T.R. Burrell OBE had a saying that “elections are an excuse for people to do nothing”. Fortunately we only have a month until the US election, although the Inauguration is at the end of January. This Blog sets out notes prepared by your Diarist for a lunchtime meeting of Burrell advisors on Friday 2 October 2020.
Opportunities & threats from 1st debate:
a) If Biden wins, he said in debate that have to attend to health issue first. If the rest of the world is any guide, this may be a six week shutdown of US, including movement restrictions. Biden knows vaccine is 2021. He will follow the Fauci health advice. The US market may not have priced this in. In March we said we would only invest if the double derivative of new cases had reached an inflection point – it hasn’t in the US. So on this test, there may be further downside in US on health issue.
b) If Trump wins, he will try to muddle through by expediting phase III vaccine trials with large sign ups of US population & roll out of Rapid tests. Market impact: unknown but probably –ve short term & buying opportunity.
Global economies in midst of major Keynesian fiscal stimulus. US PPP, Aust Jobseeker/Jobkeeper, other equivalents around the world. About to be further supplemented with infrastructure, manufacturing & other fiscal spending. Largely funded by debt. Biden, unlike Trump proposes corporate tax increase from 21% to 28% & increase personal tax rates top 1% taxpayers to 43% & 45%. Biden proposed removal CGT tax discount should accelerate US selling during October. Corporate tax rate increase reduces Intrinsic Value stocks by ~10%. Biden also noted in his First Debate address that leading US technology coys not paying much tax – might tighten corporate alternative minimum tax for corporations, currently @20%. Economic growth 2021 to be impacted by post COVID adjustments & end to temporary measures PPP Jobkeeper etc. US already having trouble gaining political agreement to extend these measures. Democrats will spend more, but net of taxes same/less. Biden appears to want to bring tax increases in quickly, which politically would be the usual strategy. Conclusion: no matter who wins, US market may think party is over for a while & have a further 10-15% correction. Lower growth rates should reverse some of extreme P/E expansion of past couple of years.
Reasons correction won’t be larger:
III interest rates TINA
Global interest rates lowest in our lifetimes. Emerging markets impacted significantly by COVID – out of control India, Africa, South America. So bring funds back to US. Equities yields better than alternatives (There is no alternative). We have seen Fear of Missing Out (FOMO) rallies at various times in past year.
What could extend US correction?
Momentum, ETF investing and new home-based COVID investors has driven US market over recent months. A correction may trigger an exodus by all three of these investor classes, creating downside momentum. Many institutional investors have sat on the sidelines eg $US120B cash pile of Warren Buffett.
IV International investment
Given first rule is not to lose $, we have been deferring further international managed funds & direct international, unless there is a strong conviction. Have switched some unhedged to hedged at $A/US 65c & now 70c. Infrastructure investment in a low interest rate environment will provide opportunities.
V Australian domestic equities
Majority of Australian market is good value, particularly cyclicals, which have not recovered including energy, banks, insurance, telcos. So first order of priority is to hold positions. Growth stocks are overvalued as a generalisation & may be subject to downward correction. Specific opportunities:
- Cyclical stocks undervalued by a market that has overpriced growth at any price.
- CSL largest stock in Australian Bourse. Burrell p/folios generally u/w. Likely beneficiary vaccine in Australia & perhaps globally if UQ vaccine is THE winner or one of two/three key breakthroughs. So BUY on any weakness & consider option plays to lower entry cost eg sold PUT at $280 collecting $10 premium. Any shutdown US may lead to buying opportunity as elective surgery put on hold.
- Gold. Money supply expansion & minimal interest rates result in historically low contangos & gold may be a better store of value than currencies.
- Property trusts: office trusts likely mispriced as most firms will return to CBD offices in 2021.
- Look for opportunities growth at realistic prices on any pullback. Appen, CSL, Wisetech, Resmed, Carsales, Technology One. Should have some healthcare, software & internet stocks in all portfolios. Gradual increase in portfolio weighting from old to new economy.
- Iron-ore independent research remains +ve , but this may be as good as it gets for iron-ore. Chinese will be encouraging Vale in Brazil to ramp up & Simondou mines in West Africa to be developed to provide alternate sources of supply.
- Oil: Fidelity Asia fund manager in presentation ~April expected V-shaped recovery. Did recover $US20 to $US45, but no impetus to head for $US60 in short term. Probably Aust’n oil/gas stocks cheap Woodside Santos but currently drag on p/folio performance.
- Reopening theme: in short term Australia about to reopen & have travel bubble with NZ. Identify o/sold stocks likely to benefit, but be wary those with high fixed costs who will continue to be impacted for another 1-2 years eg Flight Centre, Qantas. Don’t get too far ahead of the curve. Profit is in last 10-15% of sales, so without those sales, many businesses will be in loss or break even.
- Reopening theme phase 2: a successful vaccine together with confidence in Rapid COVID tests will provide further impetus to a second phase of the reopening theme.
In conclusion, markets remain challenging. Analyst independent research earnings estimates show the widest range for many years. The impact of COVID in 2021 when the economy reopens fully but Government support reduces remains the elephant in the room. But the above thoughts provide a framework for adding value to portfolios during the US election period and beyond.
Postscript: Trump has Covid ever the master of diversion
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