MORE U.S. INVESTORS MOVE TO CASH
Fund managers reposition portfolios with mid-term polls less than 100 days away
THE likelihood of a Democratic party takeover of at least one house of the United States Congress in the mid-term elections in November is prompting some portfolio managers to move more money to cash and rotate away from sectors like financials and technology that could see greater regulatory scrutiny.
Fund managers from Federated Investors, OppenheimerFunds, and BMO Global Asset Management are among those who are repositioning their portfolios and seeing cash as more attractive with the November 6 elections less than 100 days away.
Chief among their concerns: a so-called Blue Wave of Democratic victories could end the Republican Party’s single-party control of the White House and Congress, leading to both more investigations into possible abuses by the Trump administration and more stock market volatility.
“The reason for our concern very simply is that Democratic voters are very engaged and likely to come out in force, and the party in power typically does not do well in the first mid-terms,” said Phil Orlando, chief equity market strategist at Federated Investors here.
Such a move would also embolden Democratic presidential candidates to run on a platform in 2020 calling for universal healthcare, increasing the minimum wage, and repealing the Republican-led corporate tax cuts passed in December, all of which could slow economic growth, he said.
Concerns about a resounding Democratic victory prompted Orlando to sell some of his US stocks in late June, leaving his equity still overweight toward US equities but down from eight per cent to five per cent, and move those assets into cash.
Orlando expects that the US stock market will tumble at least 10 per cent between late this month and next month as the broad market starts to price in Democratic gains in Washington, he said.
Real Clear Politics, a polling aggregation site, has Democrats leading by seven percentage points on a generic ballot, but rates the chance of a Democratic takeover of the house as a tossup.
Democrats would need to retake 23 seats to gain a majority in the house, and two seats to control the Senate. Of the 36 Senate seats being contested, only nine are held by Republicans, and 10 Democratic incumbents are running for re-election in states won by President Donald Trump.
There are few signs in financial markets, so far, that Wall Street expects the economy to stall if the Democrats were to regain control of at least one house of Congress.
The US benchmark S&P stock 500 index is up 5.2 per cent for the year, and has gained nearly nine per cent since its lows in early February.
The US economy grew at an estimated 4.1 per cent in the second quarter this year, the Commerce Department said, its fastest growth rate since 2014.
Yet a victory by more progressive Democrats in the mid-term elections could lead to a greater regulatory focus on financial and technology firms that have so far received a pass from the Trump administration, said Jon Adams, senior investment strategist at BMO Global Asset Management,
A victory by Democrats may also lessen the likelihood of a bipartisan deal on infrastructure and strengthen calls for reversing corporate tax cuts, he said.
“The Democratic Party is struggling with the same issue that Republicans have dealt with, which is having two parties within one party,” he said.
“We think the economic outlook for the next 18 months is still very strong and a lot of that is due to the fiscal stimulus of the Republican-led tax cuts,” he said.
Even if Republicans do retain one or both houses of Congress, there is little likelihood that the so-called “Trump trade” will come back in force, said Brian Levitt, senior investment strategist at OppenheimerFunds.
The “Trump trade” was a strategy that involved buying financial, industrial and value stocks after Trump’s victory in the 2016 presidential election in the hope that it would lead to banking deregulation, infrastructure spending, and tax cuts.
Instead, he said, growth stocks will likely continue to lead the market, while fiscal stimulus in the US provided by the corporate tax cuts will help push emerging market equities higher by boosting inflation, he said.