Quality Growth Boutique
Global equities specialists since 1984. We provide a boutique investment experience for institutional and intermediary clients around the world.
History is a good reminder that it is difficult to predict market reactions, and that elections do not have as tremendous consequences on markets as people may believe. Market anxiety over election impact is generally over-exaggerated. How the markets react relies on more than who gets elected, e.g., valuation levels of markets, economic environment, economic prospects, and, most critically, the outlook for corporate profits. The underlying health of the economy and corporate profit growth, ultimately, are the factors that will impact stock prices.
While parties are different, candidates do not always have drastically different goals. For instance, regardless of who wins the US presidential election less than two weeks away, we believe the current trajectory of an increased focus on US-China relations, with respect to Intellectual Property theft, trade relations, and the intertwining of related ESG issues, will remain. We think the US foreign policy stance on China will be quite similar whatever the administration, but certainly, Biden’s way of negotiating with the Chinese will be different from Trump’s. At the same time, we must recognize the limitations within politics. Presidents or administrations only have so much bandwidth and are limited to tackling a few key items on their agenda. What we could see come to an end, again regardless of who is elected, is the politicized nature on both sides of the aisle in dealing with the Covid-19 pandemic.
Markets have been critical of the Federal Reserve’s inability to increase inflation. Recent action has shown that the Fed is either losing incremental potency with its actions or heading towards no effectiveness at all. Investors should allow for the potential of higher volatility with regard to issues that have been benign in the past. We do not expect a presidential change in the White House to have a material effect on Fed policy. However, an aligned trifecta of Democratic control in Congress and the White House (i.e., a scenario with Biden elected president and the Democrats retaining the House of Representatives, but also the Democrats taking control of the Senate), would increase the likelihood of a potentially sizable fiscal stimulus legislation to pass. After many years of the Fed’s playing a predominant role in supporting the economy, due to the general absence of a substantive fiscal response, such a change could allow the Fed to take a step back from its overly aggressive stimulative posture and allow some Keynesian measures to help out the real economy more effectively, such as boosting job creation and business investment.
From an investing perspective, it is important to tune in more to the underlying status of specific businesses and their durable, sustainable growth prospects. Drilling down into company fundamentals and looking for predictable long-term earnings power can help reward investors regardless of the macro or political backdrop. As bottom-up investors, we are not overly concerned with the outcome of the upcoming US election, as policy swings will not necessarily have a material impact on our portfolio companies.
A Trump re-election is unlikely to result in much change across the broad sectors as fundamentals now stand. A Biden win will bring a more environmentally focused agenda, which could see more pressure or scrutiny on sectors sensitive to environmental regulation, such as energy and commodities. Given health care has been a big Democratic focus, a Biden win could see more volatility in that sector, but the health care names with solid fundamentals should continue to do well. Financials, which already have been under pressure, also could see some volatility, as these companies are less likely to get much reprieve or incremental improvement, from a regulatory standpoint, given the typically heavier hand of a Democratic administration.
It is impossible to make predictions. The good news for our investors is that our investment decisions and portfolio positioning are not dependent on the election outcome or any political conclusions. Investors should look for companies with proven and repeatable models and established market-leading positions. It is critical for investors to remember that the success of a sector, and more importantly companies in that sector, is determined by the underlying profits and the ability for those profits to sustain and grow.