A Eurizon Market Focus, a special report on the US Presidential election, titled, “US Election 2020: Joe Biden is the 46th President.”
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After a few anxious days over which votes were counted, the outcome of the elections in the United States was in line with expectations: Joe Biden won a sufficient number of Electoral College votes to take office in January 2021 as the 46th President of the United States, and Congress is split: Democrat majority in the House of Representatives, Senate under Republican control.
Markets React Positively To Joe Biden Becoming The President
Although some uncertainty is still weighing on the result, due to Trump’s stated intention to dispute the vote count, the markets do not seem to be affording any credit to this development and have, in fact, already reacted positively to Biden’s election. Upon announcement of the result, the stock markets scored gains, US government bond rates stabilised, after rising ahead of the vote, and the dollar, that over the past few days had strengthened, is now weakening slightly.
The positive reaction of the stock markets signals that the markets expect a new fiscal stimulus package to be approved in January 2021; the fact that US government bond rates have slowed their upswing signals that the markets expect the package to be substantial, but not to the point of generating risks of an overheating of the economy. Most importantly, the stock markets seem reassured on the potential contents of the new administration’s fiscal policy under Biden: as the different positions held by the Democrats and the Republicans will have to be mediated in Congress, the measures ultimately taken will presumably be less unfavourable for businesses than assumed on the eve of the elections, when the Democrats were expected to sweep the board.
Therefore, the markets seem to like the combination of Joe Biden President and split Congress between the Democrats and the Republicans. Some factors, however, could generate uncertainty in the near term. There are two main themes in the spotlight in the immediate term:
- A potential dispute of the vote count by Trump – a development that is apparently not generating excessive concerns on the market, but which is any case causing some uncertainty.
- The Coronavirus emergency – the contagion is accelerating across the world, and in the United States as well. In Europe, many countries have already put in place new restrictive measures limiting personal mobility and economic activity. In light of the statements made by Biden on his intention to fight the pandemic more effectively than achieved by Trump, the markets are starting to fear that restrictive measures could be implemented in the United State as well, that would counterbalance the effects of an expansionary fiscal stimulus package.
Both themes, however, seem to represent risks in the near term, rather than in the medium term, when the scenario continues to seem favourable, supported by the prospect of new fiscal stimulus and by positive news flows on the availability of a vaccine in 2021.
Positioning of Eurizon’s portfolios
The combined effect of the outcome of the US elections, with the prospect of a new expansionary fiscal package, and of expectations for a vaccine with the power to stop the spreading of the pandemic in 2021, prompts us to confirm a positive medium-term scenario and a favourable bias towards risk assets in building our portfolios.
We continue to see limited value in the government bonds issued by the United States and Germany, on which we therefore confirm our underweighting view, mostly concentrated on German bonds.
Neutral positioning confirmed on peripheral euro area government bonds, coupon rates on which are more interesting than on German bonds, but which now offer narrower spreads than in previous months.
We continue to take a favourable view on spread bond markets, namely emerging countries, High Yield and Investment Grade corporate bonds. The overweighting is mostly concentrated on Asian emerging countries, that in the present phase see to be controlling the pandemic more effectively, can boast stronger economic data, and could benefit from the new Biden administration, that will probably show greater openness to the globalisation of the economy than Trump.
On the stock markets, we had reduced our positioning to Neutral in consideration of the persistent spreading of the pandemic at the global level, and in waiting for the vote in the US. Now, we are gradually stepping up exposure, taking a contrarian approach to volatility episodes and in waiting for the fiscal stimulus package in the US to take shape.