We are pleased to introduce The Investment Intelligence Podcast, where experts discuss all things investing, from recent market developments, to strategy, sustainable investing, asset allocation, risk management and more.
Financial markets could remain volatile as we head towards US elections in November – particularly with the prospect of a contested result. But this could provide a tactical opportunity for investors to add risk to portfolios, or to further diversify their holdings.
The build-up to a US election is typically characterised by market volatility, and this year it has been exacerbated by the Covid-19 pandemic; any legal or constitutional challenges to the election result would likely add to market uncertainty
President Trump’s Covid-19 diagnosis adds greater uncertainty to an already volatile period – but volatile markets could provide investors with tactical opportunities
If we see a definitive election result and favourable developments in the fight against Covid-19, we expect a broader set of sectors and regions to benefit in 2021 – beyond the large-cap US tech stocks and growth themes that have done well this year
How should investors view the run-up to the US elections, particularly in the context of Covid-19?
Mona Mahajan: Historically, the months before US elections have been volatile for the markets, and this year may be no different. The pre-election period comes during a global pandemic that has already caused tremendous swings. In February, the S&P 500 Index reached all-time highs before Covid-19 triggered a 34% drawdown. The S&P then rebounded nearly 60% before a correction in September. We expect some form of this volatility to continue until the election results are known. Market performance will also largely be driven by virus trends, which continue to remain precarious heading into autumn, while President Donald Trump’s Covid-19 diagnosis makes an already volatile period even more uncertain.
However, if infection rates improve, an effective vaccine comes online next year and the global economy continues to recover, the market outlook for the US and elsewhere could improve notably. So investors may want to use periods of market volatility in the coming months as a tactical opportunity to add to their positions in stocks and other risk assets.
Peter Lefkin: Even in the face of Covid-19, US election polls have been remarkably stable, with former Vice President Joe Biden holding a steady and consistent lead over President Trump. Yet the key to winning is not in the national popular vote, but instead in how the candidates do in about eight swing states. That means Mr Trump has a fighting chance – although probably not as much as he did at this point in 2016, when he was down in the polls by a smaller margin. The health, economic and social fallout from the pandemic is the most prominent issue of the 2020 election, but it is intertwined with existing long-term tensions in the US that Covid-19 revealed and amplified. For example, some US citizens are faring comparatively well despite Covid-19: they can stay home and work virtually. Other Americans are having a much harder time: they must report to work and risk getting sick, or they can’t work and have lost their income. The coronavirus hasn’t changed many minds in terms of who supports which candidate, but people who did change their views seem to have moved to Mr Biden. In a close election, any movement is critical. Perhaps equally important, the pandemic has hardened existing attitudes, making it less likely that there will be any significant shifts from one candidate to the other before the election.
So far, just a few sectors have powered stock markets’ tentative recovery. Will that continue, and what does it mean for investors?
Mona Mahajan: We’ve been expecting market participation to broaden – meaning more segments should do well beyond the “Covid winners” of technology, consumer discretionary and healthcare. A steadily reopening economy, more fiscal stimulus and favourable developments in the fight against Covid-19 would help speed this rotation. In the US, the value cyclical sectors of industrials, financials and energy have been beaten up this year while growth sectors have soared – but this may shift somewhat in the next six to 12 months. For example, consider that both major presidential candidates are proposing strong infrastructure-spending packages. That seems to be positive for industrials and manufacturing no matter who wins.
Broader participation also applies to other regions globally. Europe has attractive opportunities in value cyclicals in the healthcare and financial sectors, as well as parts of the energy sector. And China offers exposure to secular growth stories – particularly in growth technologies such as artificial intelligence and 5G communications. The US dollar has also weakened this year, which could help non-US assets.
Some unloved sectors could be well-positioned as the economy reopens
Year-to-date 2020 S&P 500 Index returns by sector
Source: Bloomberg and AllianzGI. Data as at 30 September 2020. Past performance is not indicative of future results.
Will US interest rates stay low – and what does that mean for inflation?
Mona Mahajan: The Federal Reserve has made it clear that it won’t raise rates for some time – potentially until the end of 2023. Low rates are keeping investors on the hunt for income, and some are being forced to invest in riskier assets to meet return and yield targets. The Fed has also announced a shift in its inflation-targeting policy, indicating that it will allow inflation to temporarily overshoot its 2% target to balance the nearly 10 years that inflation hasn’t met that goal. This scenario – low rates, ongoing monetary and fiscal stimulus, and the potential for economic growth to accelerate – could push up inflation expectations in the coming years. But in the near term, rising economic growth and normalising inflation should provide a good backdrop for stocks and other risk assets.
If Mr Biden is elected president, how could that affect the financial services industry and regulations?
Peter Lefkin: Mr Biden’s platform is more nuanced than Mr Trump’s, whose policies have generally been good for the financial services industry. Mr Trump helped repeal the Obama administration’s fiduciary-duty regulations, and he has been a strong supporter of private investment plans. Still, only about 50% of people employed in the US private sector have access to private retirement accounts such as a 401(k). Mr Biden has proposed policies to encourage broader participation in the markets – including implementing tax credits that could increase retirement-savings rates for lower-income earners and younger workers.
Mona Mahajan: Mr Biden’s policy proposals call for higher corporate taxes, capital gains taxes and taxes on wealthy individuals. He would also roll back some of the recent financial-sector deregulation measures. Taken together, these policies could hurt corporate earnings, especially for those sectors that benefited the most from tax cuts and deregulation – financials in particular – as well as large multinational companies with overseas operations, including technology and healthcare firms. However, tax hikes may not be an immediate priority for Mr Biden while the US is recovering from recession, and he plans to use the proceeds from any tax increases to invest in growth areas such as renewable energy. Mr Trump, meanwhile, wants to maintain the status quo: he would like to preserve his tax cuts and deregulation measures, and perhaps even make his recent payroll tax cuts permanent. Overall, however, the implementation of either candidate’s plans will depend on which party controls the US Congress after the elections.
What are the main risks investors should keep an eye on?
Mona Mahajan: In the near term, we think the two primary risks are a resurgent coronavirus and the election result being contested in the courts. These factors would likely create uncertainty for markets, compounded by traditionally volatile September and October months. But the election result will eventually be decided, and as of now it appears that 2021 could bring one or more viable vaccines. So if these risks are resolved, and if consumer activity around the globe improves, financial markets could perform well – particularly against a backdrop of low rates and ongoing fiscal and monetary stimulus measures.
Investors may face volatility in the near term, but they could use periods of consolidation – market pullbacks or sideways movement – as tactical opportunities to add risk to portfolios, or to further diversify their portfolios. We see the potential for a broader range of sectors and regions to participate in the market’s upside over the next 12-month period. Europe and China are regions to watch, as are industrials and select parts of the financials and energy complex – particularly clean energy.
About the author
Senior Vice President of Government and External Affairs
New York, New York
Peter Lefkin is the senior vice president of governmental and external affairs with Allianz of America Corporation, which he joined in 1988. He leads the firm’s state and federal lobbying efforts in the US. Mr. Lefkin has a B.S.F.S., cum laude, from the Georgetown University School of Foreign Service, and a master’s in public administration and a J.D. from Syracuse University.
Investing involves risk. Equities have tended to be volatile, and do not offer a fixed rate of return. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.