Wellesley WeeklyWatch – Trump and Biden debate for the final time

27 October 2020

Stock Take

The effect of the US election result on markets is up for debate

Last week saw Donald Trump and Joe Biden duel for the last time – with the election just over a week away. The debate was more controlled than their first meeting (possibly helped by their microphones being turned off to stop them talking over each other), with viewers being impressed by the performance of both candidates. Analysis company FiveThirtyEight also found that the final debate didn’t have much of an impact on how favourably people viewed either contender.

Americans who haven’t already voted will go to the polls in a little over a week to decide whether Trump will get another four years or whether the keys to the White House will be handed over to Biden. As it stands, the challenger is still leading the national presidential polls, but as the BBC points out, these aren’t a full-proof way of predicting the result – as Hillary Clinton found out in 2016.

The stimulus deal stalls again

Another factor that investors are keeping a keen eye on is the hoped-for stimulus deal, something that has so far failed to get off the ground. There were some reports of progress last week, but by Friday the two parties had resumed finger-pointing. However, many investors believe that the deal is likely to pass after the election regardless of who wins, given that Democrats and Republicans agree on the need for more support.

Investing through any election can be a nerve-wracking experience, not least when the stakes are this high. But neutrality and a long-term outlook are an investor’s biggest assets when political risk elevates market volatility. Beyond the headlines, there’s plenty of historical data showing that annual US stock market returns are generally positive during presidential election years, and that returns are broadly similar during the terms of both parties.

Brexit agreement looks likely next month

Meanwhile, coming back across the pond, and Brexit trade talks have entered the final straight. Talks resumed in London last week, having passed the 15 October deadline set by Boris Johnson. Press reports suggest that the two sides are targeting an agreement in November.

Politics joins COVID-19 as major influence on markets in 2020

It may seem as though political events are reigning supreme on markets at the moment – and that’s because they are. Events such as the US election, Brexit trade talks, and the relationship between the US and China have combined with the impact of COVID-19 to cause high levels of uncertainty.

This is evidenced by the fact that the third-quarter earnings season has garnered less attention than it usually would, suggests Chris Ralph, Chief Global Strategist at St. James’s Place. “Geopolitics has had a greater influence on markets over recent years than at any time during my career,” he notes.

Still, there were some interesting third-quarter results to take in last week. On Friday, European equities edged higher after some better-than-expected results from banks like Barclays and Nordea. But elsewhere, many companies are showing the strain, especially in sectors like hospitality and travel, which have been hit hard by COVID-19.

Investors can probably expect more of this deviation as the year draws to a close in the challenging environment of the pandemic, says Mark Holman of TwentyFour Asset Management, co-managers of the St. James’s Place Strategic Income fund. He expects that investors in corporate bonds will have the chance to add new names to their portfolios as companies turn to the market to meet their borrowing needs:

“Along with more frequent issuers, especially the banks and insurers, we would expect more names with less resilient credit stories to try to access the market, as for this latter group the market has only recently opened up. For bond investors, some of these might represent opportunities to add some pro-cyclicality to portfolios, whereas others should come with a strong health warning.

Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on that is far from guaranteed. Expect winners and losers.”

Regulators take aim at Google

Early last week, the United States Department of Justice (DOJ) filed an antitrust lawsuit against Google, accusing it of suppressing its competition unfairly. The company is a “monopoly gatekeeper for the internet”, say lawyers for the DOJ, who are trying to force the technology giant to change.

Given how dominant Google is in internet search and digital advertising, there’s been plenty of speculation that such a move was in the works. But what does it mean for investors who own its parent company, Alphabet? Hamish Douglass of Magellan, Manager of the St. James’s Place International Equity fund, which owns Alphabet argues:

“While these threats need to be monitored, it’s unlikely that regulators will permanently reduce Google’s competitiveness in search or digital advertising,” argues “Alphabet’s strong presence in a wide range of products and services [such as artificial intelligence or drone delivery] give it a strong competitive advantage.”

He adds that the fact that the its core product, Google, has become a verb like ‘hoover’ or ‘photoshop’, is evidence of how widespread and essential it is:

“Alphabet’s growth rates are likely to fall over time. But any company that owns a household verb doesn’t need much to go right for it to deliver bumper returns for its investors for many years.”

Wealth Check

The news that the Bank of England is considering taking the cost of borrowing below zero has hit the headlines recently.

At the beginning of this month, the UK’s banks received a letter from the Bank of England, asking them how ready they would be if the base rate – currently 0.1% – moved into negative territory. This would be a move that would be a first in the UK. But could it happen?

Last week, Gertjan Vlieghe, who sits on the Bank’s Monetary Policy Committee (MPC), warned that the second wave of COVID-19 was holding back consumer spending and suppressing business investment. He said the central bank would need extra firepower to boost the economy and went on to back negative interest rates as another option to stimulate lending. All four external members of the nine-strong MPC have made comments that support negative rates.

Azad Zangana, Senior European Economist & Strategist at Schroders, says:

“Negative rates should, in theory, encourage borrowing and discourage deposits and savings. But, in practice, they can result in some bizarre outcomes – for savers and mortgage holders.”

Of course, for savers it’s a grim prospect. According to an October report by Moneyfacts, the average no-notice account rate is just 0.23%, nearly two-thirds lower than this time last year, but it could get worse. In Sweden, Switzerland and other places with negative rates in place, savers receive zero interest, but do not actually pay the banks to hold their money.

In European countries with negative interest rates, ‘reverse-charging mortgages’ are no longer unfamiliar. But rather than make monthly payments to the borrower, the lender reduces the outstanding capital. It means mortgage holders can end up paying back less than they borrowed.

So, how might stock markets react? Zangana suggests:

“Lower interest rates could be positive for the UK stock market because they increase the value of future earnings that companies make that would eventually be paid out to shareholders. Companies’ earnings become more valuable in a low-interest rate environment. When this happens, share prices tend to appreciate in value.”

All of this is hypothetical at the moment, but as it stands, we believe there’s no cause for panic – but it might still be sensible to speak to your Wellesley adviser to review your options going forward.

The Last Word

“We can’t use yesterday’s methods to regulate the future.” – Jack Ma, owner of Chinese fintech giant Ant Group, argues for an overhaul of the international financial system ahead of the company’s expected IPO this week.

The information contained is correct as at the date of the article.

Magellan, Schroders and TwentyFour Asset Management are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2020; all rights reserved

Back to news