Investors are now showing “confidence and conviction” about the future, despite the looming headwind of the US presidential election.
US stock prices have now exceeded their pre-crisis highs while credit spreads have almost fallen to pre-COVID tights – something that MFS portfolio manager Rob Almeida believes signals certainty about the outcome of the US election despite the growing possibility of an upset.
And while he’s unwilling to call the election for either side, he believes investors should be hedging their bets.
“Regardless of my view, investors are showing confidence and conviction about the future,” Mr Almeida said.
“Given everything 2020 has already thrown at us, the question I have is this: Do you feel certain?”
A Biden win could result in a significant drag on earnings due to a partial rollback of the Tax Cuts and Jobs Act of 2017 as well as an increase in the federal minimum wage from US$7.25 to $15. Both candidates will also look to bring US manufacturing and business home – another potential pressure on margins.
“MFS analysts have been re-modelling their coverage, taking into account multiple potential outcomes on earnings, whether under a Biden or Trump administration,” Mr Almeida said.
“A Trump victory would widen the ranges of possible outcomes for some assets but not for others. The same goes for Biden. Also, we view changes in government policy through a sustainability lens. While a particular policy may hit short-term profitability, it could be beneficial for the sustainability of those profits over the long run. Certain companies may find, for instance, that treating employees like stakeholders provides benefits not easily observed on a quarterly P&L.”
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