November 5, 2020
US election, a goldilocks scenario for financial markets
Randal Jenneke
Randal Jenneke
Head of Australian Equities
While the official outcome of the US election remains unknown, the odds of a Biden win and a divided government (Republicans maintaining control of the Senate) are increasingly becoming the most likely outcome.
This outcome is often seen as the ‘goldilocks scenario’ for financial markets – no radical policy changes (that could hurt corporate profits) and the Fed providing ample liquidity to try to support the economy and financial markets when required. The market over recent weeks appeared to be positioning for a “Blue Wave” which carried the prospect of a much larger stimulus package which could have exceeded U$5tn in total, ~70% more than our highest prediction under a divided government. With a Blue Wave scenario all but removed, it is very unlikely Democrats will be able to raise US corporate and income taxes and pursue the more controversial aspects of their progressive agenda.
Stimulus and tax hikes are critical policies which the markets in our view have been positioning for. This has led to an increased appetite towards value cyclicals. The market was positioning itself for a ‘reflation trade’ driven by the prospect of higher inflation and therefore interest rates, and, thus style rotation from growth to value stocks. In an environment of heightened uncertainty we have been planning for 3 likely scenarios (two of which revolved around the election). We are now heading towards our first scenario of a split congress which we expected would result in lower stimulus and continued outperformance of growth. Ultimately this means “more of the same”. A divided government will constrain stimulus and tax hikes; we expect this to continue to favour growth stocks.
Within our Australian equity strategy we have been repositioned in favour of cyclical growth (such as James Hardie) and recovery names (such as IDP) albeit still holding a healthy exposure to defensive growth (Healthcare) and some extreme growth (such as Xero). This positioning sees us well placed for the likely outcome of the US election.

We continue to expect an economic recovery, locally and globally, with additional fiscal and monetary stimulus. However, this is likely to be at the more moderate end of previous market expectations. We continue to believe low interest rates will be required for quite some time to support the recovery. The RBA appears to agree, hence its decision to cut interest rates on Tuesday and more importantly extending its yield curve control strategy by announcing a AUD$100bn bond buying program for 5yr and 10 yr Government debt.

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