Stocks and sectors to consider for a Trump or Biden victory

James Gerrish

Market Matters

Personal politics aside we have a US election early November which the bookies are telling us is very close as Trump attempts to narrow the gap – this morning Sportsbet has Joe Biden favourite at $1.75 followed by Trump at $2.1 as we head into the debates. 

There are a number of different potential outcomes and by definition interpretations of such results, unfortunately the only certainty is the winner will have to deal with a country struggling with ~200,000 deaths from COVID-19 plus an economy having witnessed a record drop in GDP plus soaring unemployment.

This report is deliberately kept simple and concise so readers will comprehend our logic over the coming weeks as November 3rd looms fast. Remember after Trumps first victory and BREXIT polls / betting odds should definitely not be regarded as set in stone.

4 scenarios to consider

We believe the stock market will primarily react to who controls the Senate, not necessarily the headline the press will focus on:

  1. If Trump wins, the Republicans hold the Senate and Democrats remain in control of the House we expect a small rally as uncertainty is removed – investors will expect the pro-business environment to be maintained but China relations may deteriorate further.
  2. If Biden wins, the Democrats take the Senate and hold the House we envisage at least an initial ~5% spike lower, a move echoed in history from this outcome however importantly the market usually recovers extremely well after a tough November i.e. buy the weakness.
  3. Biden winning but the Republicans holding the Senate is regarded as many as the most likely and best for equities as it would hinder the new president’s ability to implement his new policies such as undo Trumps cut to corporate tax and general deregulation but relations with China might improve.
  4. The wildcard of a delayed / disputed result is comparable to 2000 when the S&P500 fell 10% by the end of November – NOT good for stocks.

Not surprisingly Market Matters expects volatility to increase in the months ahead but by definition with this comes opportunity for the prepared investor. Simple mathematics tells me if we see a strong rally in October increase cash levels in case, we see either scenarios 2 or 4 unfolding makes sense as it would afford investors the flexibility to buy a likely pullback in stocks.

Market Matters is anticipating elevated volatility in Q4 of 2020.

US S&P500 Index Chart

Scenario 1 – no change

If Donald Trump can again surprise the polls and win re-election MM expects markets to embrace the result, at least short-term. The current consensus is the outcome will favour Tech, Financials & Defence but not Retail. However, we just believe it’s likely to be largely more of the same but an important eye should be cast towards US – China relations, another potential concern for companies like A2M we mentioned earlier.

One stock which is interesting MM if Trump wins is emerging defence contractor Austal (ASB) which delivered solid results in August including a 13% increase in revenue for the full year to over $2bn.

Market Matters likes the risk / reward on ASB around $3.

Austal Ltd (ASB) Chart

Scenario 2 – A Biden & Democrats clean sweep

An interesting scenario where stock markets worry about a Democrat President, but the historical performance of stocks says they should be dancing in the streets after an initial knee jerk lower. If this scenario eventuates, we like Infrastructure and renewable energy at the expense of Tech and Healthcare which are likely to come under increased regulatory scrutiny. MM is long construction goliath LLC looking for an increase in local and international infrastructure spending but a $310m loss in FY20 is currently weighing on the share price, a few new contracts and a general global economic turnaround is what the company obviously requires.

Market Matters likes LLC below $12.

Lend Lease (LLC) Chart

Scenario 3, Biden wins & Republicans hold Senate

A split congress might surprise many to know is historically the best outcome for stocks as it maintains balance ensuring one party cannot become too extreme, historically a dividend congress usually leads to ~4% outperformance. From a local market perspective I would be looking for opportunities / value in stocks who have been sold off around fears of global- US relations with China e.g. exporters like A2M and Treasury Wines (TWE) plus the Education and Tourism Sectors.

Our current preferred pick is currently casino operator Star Entertainment (SGR) where we see 20-30% upside.

Market Matters is bullish & long SGR.

Star Entertainment (SGR) Chart

Scenario 4, disputed result

The “yuk” scenario and while its been over 20-years since this occurred there are plenty of noises around that it could happen again, in November of 2000 the NASDAQ plunged ~20% as the result went to the Supreme Court for a decision. Simply never say never and as we said earlier this is one of two scenarios that’s likely to see a knee-jerk lower in November – note a comparable drop in tech today as 20-years ago still only tests NASDAQ’s pre-COVID highs.

Market Matters is keen on flexibility in November.

US NASDAQ Index Chart

Conclusion

Unfortunately, Market Matters hasn’t got a crystal ball hence we believe the best course of action into the election is to carry both a degree of flexibility and a well thought out plan – above is our bare bones version at this stage.

It’s also worth remembering that politics are not the main driver of markets over time, markets have rallied with many different combinations.

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Any advice provided is of a general nature only.

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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