Ignited state of AiMerica
Forgive the pun-laden headline but we are genuinely excited about the opportunity set in front of us. Joe Biden is set to become the next President of the United States, while the Republicans look set to continue to control the Senate. For markets this strikes a happy medium between increased government spending and the Republicans blocking corporation tax rises.
Investment bank Berenberg has calculated that US equities have gained on average 11% in the 12 months following all elections since 1976. This would be a bullish target for risk assets not least of which smaller companies on AiM.
In 2021 we are likely to see Global Synchronised Growth (GSG) across all markets, with GDP and earnings recovering concurrently. We last saw such GSG episodes in 2003-07, 2009-10 and 2016-17. This normally means a lower US dollar, effectively monetary loosening for the rest of the world, as well as emerging markets outperforming, commodities rising (and so too inflation) and the long–ostracised style of “value” welcomed back in from the cold.
More pertinently, with a Democratic president we expect the fiscal stimulus lever to be pulled with gusto next year in conjunction with the monetary lever already at breaking point. This should herald something of a regime shift, away from Wall Street back to Main Street, with real economic activity picking up.
This stimulus would favour cyclicals over defensives and should set the conditions for “value” to outperform; which we believe very few investors are positioned for. The second order effect of this activity is typically for a more risk-taking outlook, which would be bullish for UK assets and in particular at the smaller or value end of the market.
This is why we run dual exposures to both styles of “growth” (at a reasonable price) and “value”, to ensure sufficient diversification which helps to mitigate bottom-line portfolio volatility. The corollary of such an outcome would be bearish views for those larger cap AiM stocks that continue to trade at nosebleed levels, often over 40x earnings, despite some offering meagre growth.
The last act of the year will be the Brexit denouement and here again we see upside for UK domestic earners, an area we are actively favouring.
The tectonic plates are shifting and now more than ever investors should be forward looking. A new decade often heralds new leadership amongst asset classes. Whisper it for now, but we see this decade being one where commodities and inflation feature much more extensively than in the last. To be zero weight in “value” names that would benefit us significantly, while overweight in “growth” assets that are hugely sensitive to interest rate risk (which would surely rise should inflation get into the system) could be very bad for your wealth. In the stock market it pays to remember the axiom ‘when you find the key, they change the lock’; thankfully we had our keys cut some time ago.
Written by Stephen English
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited
20 Chapel Street
is authorised and regulated by the Financial Conduct Authority.