Will Biden trigger a bounce – or is it time to cash out?
IN THE last few days, the world’s eyes have been on the United States as the presidency has transferred from Donald Trump to Joe Biden. Thankfully, Biden’s inauguration has taken place without any repeat of the violence seen earlier this month. Investment experts believe that under Biden’s presidency, the wind is set fair for more Washington spending and a return to growth when the US exits the pandemic. But is now the time for UK investors to invest in US stocks?
Since the Republicans position themselves as the party for business, some think that a Democrat presidency will be worse for the stock market. Yet the Democrats’ new President was greeted by the S&P 500 Index – comprising America’s biggest listed companies – posting a new high.
Helal Miah is investment research analyst for The Share Centre. He says: ‘A traditional view among investors is that Republican Presidents are better for the stock market because of their low tax and pro-business stance.
‘Yet scrutiny of the past suggests this is not the case, with both parties’ impact on the stock market being roughly equal.’
He adds: ‘This is particularly noticeable once you strip out the stock market boom in the Clinton years – 1993 to 2001 – and the adverse impact of the 2008 financial crisis on George W Bush’s legacy.’
The Biden administration will certainly have to tread carefully as it copes with a power balance that is teetering on a knifeedge. With the Senate split 50:50 between Republicans and Democrats, Vice-President Kamala Harris has the deciding vote on key issues.
So, some Democrat policies, such as tax rises and curbs on large technology firms, may need to be diluted if they are going to find their way on to the statute book.
Jason Hollands, a director of wealth manager Tilney, says: ‘The very thin Democrat margin in the Senate means more radical policies will need to be tempered.’
Some policies likely to result in legislation include greater fiscal stimulus, some tax rises and a return to green spending – with Biden pledging to rejoin the Paris Accord on climate change. And of course, there will be a big focus on fighting Covid-19.
Darius McDermott, managing director of wealth manager Chelsea Financial Services, says: ‘The new administration has a slim majority so while economic stimulus is expected, big reform is less likely in areas such as technology and healthcare. This should be good news for markets.
‘Although tax rises are likely, they will be more an issue for next year. Biden will first want to get the pandemic under control and then the economy back on its feet.’
Can stock market growth continue?
WHILE many investment experts agree the change of President is positive for the US economy, UK investors are in a quandary because of the US stock market’s strong performance in the last year.
The S&P 500 – the US equivalent of the FTSE 100 Index – closed last year at a record high, up more than 16 per cent over 12 months despite the pandemic. It has also started the new year in fine fettle. Investors will wonder whether this rapid growth can be sustained. Hollands describes US valuations as ‘extremely stretched’, with technology giants such as Facebook, Google and Netflix accounting for much of the market’s gains.
Yet, Terry Smith, one of Britain’s most successful fund managers, disagrees. In a note in recent days to investors in his £23 billion Fundsmith Equity Fund, he said he did not expect technology stocks – most of which are US listed – to crash.
He believes the likes of Facebook, Microsoft, Amazon and PayPal are not a homogeneous group and their success is down to a range of factors. He says a ‘one-size-fits-all label does not help much in evaluating them’.
Meanwhile, there is a currency risk associated to investing in the United States. Hollands believes the dollar might weaken against the pound in the coming months.
He explains: ‘Whatever US investments you might hold – equities, bonds, US funds or global funds with high exposure to the US – a potential weakening in the dollar is going to act as a headwind.
‘This is especially so given the somewhat brighter prospects for sterling now that Brexit has played out and there is greater clarity around the UK’s future trade relationship with the EU.’
Picking the right sectors is crucial
WITH the US market riding so high, it is vital to pick the right sectors and stocks to get the most out of any US economic recovery.
Hugh Gimber, global market strategist at investment house JP Morgan Asset Management, believes the new administration could herald a change of fortune for parts of the stock market left behind by the technology boom.
He says: ‘While big technology stocks have done well, I believe the balance could now shift with some leading companies becoming stock market laggards – and vice versa.’ He argues this would mean unloved stock market areas such as finance, utilities and renewable energy getting a boost.
Fran Radano runs the £345 million North American Income fund from Philadelphia in the United States on behalf of UK asset manager Aberdeen Standard Investments.
In recent weeks, he has increased its exposure to utility stocks as well as financial companies. Gimber is focusing on companies that will benefit from increased spending on infrastructure, health and education – sectors that should get a boost from Biden.
Sam Dickens is portfolio manager at trading platform IG. He is also a fan of US i nfrastructure. He explains: ‘Investing in infrastructure helps to create jobs, which in turn boosts consumer spending. Over the long term, it could help to increase connectivity between rural and urban areas and provide equal access to key utilities; helping to reduce income inequality.
‘The benefits of infrastructure spending, coupled with the global need to actively combat climate change, mean sustainable infrastructure and green energy have become an increasingly appetising opportunity for investors.’
Funds that could provide a tailwind
INVESTORS who want to capture a potential ‘Biden bounce’ could consider a tracker fund that holds a spread of companies listed in the US.
For example, one of Interactive Investor’s top 60 investment funds i s Vanguard US Equity Index, which tracks the performance of the total S&P Index – embracing large, medium and small US companies. Yet such US tracker funds do not allow you to pick and choose market sectors.
IG’s Dickens prefers a more global investment approach. He likes iShares Global Infrastructure, an exchange traded fund that invests in infrastructure companies from all over the world, but with more than 60 per cent of its assets in US firms.
Key US holdings include sustainable energy firm Next Era Energy and rail transportation firm Union Pacific. Another major holding is wireless communications infrastructure firm American Tower.
The fund generated negative returns of 5 per cent last year, but Dickens believes it has the potential to generate profits for investors.
He says: ‘Many firms in the US energy and industrials sectors appear cheap on a relative basis and a focus on infrastructure spending could help provide a tailwind this year and beyond.’
McDermott also fancies global funds with an infrastructure bent –such as M& G Global Listed Infrastructure and First Sentier Global Listed Infrastructure.
He says: ‘There has been chronic underinvestment in critical assets in the US for many years and there is urgent need for repair, modernisation and expansion.
‘So higher infrastructure spending – albeit with a clear emphasis on renewables – will have a big impact on a number of key areas.’
For those who want funds with a renewable bent, James Carthew, head of investment trust sat QuotedData, suggests three funds operating in the US market: US Solar, Ecofin US Renewables and SDCL Energy Efficiency.
All three are currently doing deals in the US, particularly in the solar energy area.
For a purely US-focused investment fund, Teodor Dilov, of Interactive Investor, suggests Merian North American Equity.
Its top five holdings are all tech ‘giants’ –Alphabet, Amazon, Apple, Facebook and Microsoft.