Douglass: 'Goldilocks' scenario for equities

The US election outcome is largely irrelevant for investors, whose focus should remain on the race for a COVID vaccine; structural and transient trends flowing from the pandemic; and Australia-China trade ties, says Magellan’s Hamish Douglass .

In a Livewire webinar on Thursday, the Magellan Financial Group chairman and CIO suggested the Democrat candidate Joe Biden was almost assured of being named US President in coming days, despite vote counting still progressing. At the time of writing, Biden held 264 electoral votes versus incumbent US President Donald Trump’s 214 votes – just six short of the 270 required for victory.

But the current tally suggests Republicans would maintain a majority in the Senate, which would give rise to what Douglass dubs a “Nirvana”or “goldilocks” outcome for markets and corporate America.

“We’re not going to have this magical blue wave . They won’t have unlimited power to pass sweeping legislation,” Douglass said.

“This means probably no tax rises, no massive tax reform and no big left agenda. And I suspect we’re going to have a more moderate discussion globally and more normal dialogue about foreign policy.”

But even if Trump doesn’t get booted from the Oval Office, the power shift to the Democrats in the House of Representatives will benefit markets due to tighter checks and balances on Presidential control.

“You need to watch the Senate here, and that’s what markets have been watching,” Douglass said.

“The markets would have a slight preference over Biden, but either outcome is going to be fine for markets from here on in.”

"We need a scientific breakthrough"

The US election and its unfolding vote-count controversy fixates millions of people globally – but regardless of the ultimate outcome, life goes on and so will financial markets.

Douglass conceded he and his team of global equity analysts are closely watching the US election, but were primarily focused on the Senate and whether either party wins a “huge majority” – which hasn’t occurred.

“But the main thing that’s going on is still the pandemic…we’ve got these vaccine trials to contend with and I think they’re really going to drive us forward,” he said.

Temporary versus permanent: “estimation, guesstimation, speculation”

“The pandemic is a medical, scientific issue about therapeutics and vaccines – it’s outside the politicians’ control,” Douglass said.

“We need a scientific breakthrough…that will drive the economy, and the economy will in turn drive stocks.”

He discussed which trends that have taken hold during the pandemic are likely be longer-term, and which are likely to be more fleeting in their effects including:

• Remote working / work from home
• Online shopping
• Digital payments
• Stay-at-home entertainment
• Travel and leisure.

Amid rapid acceleration of many trends, such as the uptake of e-commerce and use of video conferencing technology by hordes of workers, some companies have benefited while others have been pummelled.

“Some are pull-forwards of existing trends like e-shopping…but e-commerce is going to be more structural, and streaming of entertainment is also a longer-term trend,” Douglass said. But he regards others, such as the rise in online orders of restaurant deliveries as potentially more transient.

He warned investors of the danger surrounding “extrapolating pull-forwards” in some areas of the market – which see temporary changes rather than acceleration of trends that will be long-term structural shifts.

Global travel is also a segment that Douglass regards as multi-faceted, suggesting leisure travel will bounce back to pre-pandemic levels while questioning a similar return in corporate travel rates: “People have worked out that you can do business on Zoom calls, so it’s going to be interesting to see how permanent the change is.”

“Work-from-home again is a forced situation, it’s led to a lot of flexibility but it’s not perfect and I think it’s going to find its equilibrium,” Douglass said.

“If I had a crystal ball I could make an awful lot of money, but we just don’t know…it’s estimation, ‘guesstimation’, and speculation about where that will land.”

A lot riding on vaccines

As second- and third-waves of COVID infections ramp up across parts of Europe including the UK, lockdowns are again being implemented. Douglass said these will have economic effects, but also believes the negatives can be at least partially offset.

“It will depend on the vaccine trials,” he said, referring to the four major trails that are in the critical phase 3, including those from Johnson & Johnson and the collaboration between Oxford University and Astra Zeneca.

“There is still a high expectation on these vaccine trials…and we still have no idea what the outcomes are going to be and neither do the companies themselves.”

A failure from each of the most advanced-stage trials would be “a major setback…if we don’t have any clarity on an exit point that is where markets could get really spooked.”

“But if we have success, and they expect in March we’re going to start rolling out vaccines, I think markets will look through those shutdowns,” Douglass said.

Streaming video on demand

During such lockdowns and other periods of home isolation many have faced since February, the uptake of video streaming services such as Netflix has risen exponentially.

Douglass expects the global entertainment business in this segment will fall into the hands of four players:

1. Netflix

2. Amazon Prime Video
3. Disney+
4. Apple TV+

He hinted that Netflix may be one of the recent additions to Magellan's portfolio. Netflix is one of the most mature and best-known in the field, currently with around 200 million global subscribers and a user base growing at between 20 to 30 million customers a year.

“So it could have 400 million subscribers within 10 years…and as it starts to lift subscription fees it could grow to a business with between US$20 billion and US$50 billion in annual pre-tax revenue,” Douglass said.

He also alluded to the network effect of companies like Netflix that are re-investing capital into producing original content “that stays on the platform and they then own it.”

“This is going to be one of the dominant entertainment platforms, that will produce enormous cashflows and keep growing for the next 30 years. It’s a scale game that’s getting played out.”

Watch the full webinar

Click here to access a full replay of the webinar which is available now.