Two standout stocks and a sector to avoid post US election
The anticipated blue wave carrying Joe Biden to the US presidency may have been overstated but history suggests a divided government is no bad thing for markets. And while Big Tech is a clear winner if governance is restrained and the Biden administration has its hands tied on issues like antitrust and privacy, Healthcare will not be far behind with the prospect of intense government scrutiny also fading.
However, Bob Desmond, Head of International Equities at Claremont Global and Joe Magyer, Chief Investment Officer at Lakehouse Capital, are avoiding the energy sector. A Republican-controlled Senate will likely block green-energy policies while fossil-fuel stocks will continue to face headwinds.
In this Thematic Discussion, Bob and Joe provide more detail on the US Election, including their top stock picks.
Eddie: Welcome to today’s thematic discussion brought to you by Livewire Markets. My name's Eddie Orchard, and today we're talking about the winners and losers from the US election. Biden's in, Trump's gone. What does that mean for markets? What does that mean for sectors? To help me discuss that, I'm joined by Bob Desmond from Evans and Partners and Joe Magyer from Lakehouse Capital. Joe, I'll start with you. On a scale of 1 to 10, how material is this US election for global investors?
Joe: I'd say if you're a short-term trader and speculator, it's a six. I think the extreme market response in reaction to what happened overnight backs this up. I think if you're a long-term investor with a diversified portfolio, it's a two. The reality is there are a lot of things that drive markets over time. And unless you're investing very specifically in highly regulated businesses, it's probably not a major difference in the short term.
Eddie: Bob, there's been so much hype, so much media about this US election. On a scale of 1 to 10, what do you think is the impact for global investors?
Bob: I totally agree with Joe. I think if you're a long-term investor, I think the US still has the best businesses. The sectors we look at have a massive market, good governance in terms of regulation of companies, a lot of innovation. So, if you're a long-term investor, I don't think it makes a big difference.
Gridlock good for markets
Eddie: Getting to the election specifics, it was meant to be a sea of blue across the US. But it looks quite divided now, in fact, to a point of being quite volatile in the markets. What do you think is going to be the impact across the US in general with this divided nation?
Bob: Historically, markets actually like gridlock. That's probably not a bad outcome for markets long term. I think where there's probably been a couple of shifts is where we expected the blue sweep and a lot of sort of various sectors were going to benefit. So, I think that's something investors probably need to reconsider about because some things are going to be held up, especially by the Senate.
Eddie: Joe, it was supposed to be a sea of blue. Instead it looks like we're swimming with a few potential sharks out there. What does that mean for markets?
Joe: I think it's interesting and I tend to agree it's good for markets. I think most voters would probably say they like a little bit of internal friction as well. When I think about what it means more broadly in terms of fiscal policy, I think you're going to see a little more restraint with divided government than you would if the Democrats had carte blanche to do what they wanted. So, that probably changes how we would think about inflationary risk. Probably a bit tamer now. That risk probably isn't as serious as we would have thought if the Democrats had run the table.
Eddie: If you're looking at the benefits from this election then, from a sector point of view, who stands out, what stands out?
Joe: Big Tech is the clear winner because ultimately there won’t be enough sway votes across government in order to affect major change with antitrust law in the States, which is slow to change. And if you want to change it, you need to have all your ducks in a row. And it doesn't seem like there's going to be the push to make that happen.
Eddie: Big Tech has held the US up for a number of years now. Is that the sector you agree with Joe, that it's going to benefit moving forward or have got something else?
Bob: I agree with Joe for exactly the same reasons. I think less chance of regulation, anti-trust, etc. Probably lower growth as well, lower interest rates, which they obviously benefit from. The other sector I'd probably call out would be healthcare. Again, less chance of change. And that sector has rallied really, really strongly. So, I think they're probably a beneficiary of government gridlock as well.
Technology trumps Energy sector
Eddie: What about the flip side of the coin then? Who's the big loser here? What sector are you going to be avoiding moving forward?
Bob: We would be avoiding it anyway, but to be honest, I think alternative energy. Those have run really, really hard on the promise of a Green New Deal and things like that. Still concept stocks that are unproven, so that'd probably be the sector I'd avoid.
Eddie: I thought green energy was going to be good if Biden comes in. What's a weak sector for you?
Joe: It's similar. You go back in time and people thought green energy with solar would do well with Obama, for example. They thought infrastructure would do well with Trump. Things didn't work out quite like that. I'll say energy as well, but I'll take a different angle with it. I think oil and gas and fossil fuels, this is a better outcome for them than a blue wave, but still major headwinds for those industries overall. And I think if you look at their valuations, I think that has been pretty well captured by the market.
Eddie: To dial it back to the portfolio then. What's one stock that you hold today that you think has got the biggest tailwinds moving forward?
Joe: I think Facebook is a clear winner from this on top of having a lot of things going for them. Still gaining share of a large, growing market through core Facebook but also via WhatsApp and Instagram, which are also thriving. And now it looks like risk of the business being broken up into pieces has derisked a fair bit. Combine that with a great balance sheet and I think there's a lot to like.
Eddie: Bob, how about you? What's in the portfolio that you're loving right now off the back of this result?
Bob: I guess I’ll go with Alphabet. Same sector and I think you're going to get a recovery in digital advertising there. There's still a lot of shift to go back into digital advertising. I think they're starting to do a much better job in their cloud businesses. They're getting a much better control of their costs, good capital allocation, they're pretty much giving back all their free cash flow to shareholders now. And once you strip out the cash and the loss-making businesses, you're really not paying that much more than a market multiple for core Google. So, that'd be our pick.
Eddie: It's still early days, but there looks to be some clear winners and losers from the US election.
Enjoying Buy Hold Sell?
- Give this wire a like if you've enjoyed this discussion.
- Hit follow to be notified when we release our next episode, where Jason and Catherine discuss what it will take for the ASX to move higher from here.
- If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.
MORE ON Equities
2 contributors mentioned
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.