Fund managers overhaul portfolios on ‘blue wave’ bet

Fund managers are switching out of technology and into small-cap stocks as expectations grow of a “blue wave” where Joe Biden wins the US election and the Democrats take both houses of Congress next month.

Portfolio managers at asset managers including Janus Henderson, Schroders, Invesco and Candriam said they had rejigged their portfolios in anticipation of Donald Trump losing the presidential election

“The markets aren’t really thinking about Trump. They are thinking this is going to be Biden and his crew,” said Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson. “That means fiscal easing.”

The Financial Times poll of polls suggests Mr Biden is on course to win the election, although there are several states where it is too close to call.

“We have rotated to areas we feel will benefit from a Democratic clean sweep,” said Mr O’Connor. This includes buying a Russell 2000 value exchange-traded fund to gain exposure to the domestic small-cap US market.

Should they take control of both houses, the Democrats are expected to unleash a hefty fiscal package, which investors believe could lead to an uptick in economic growth and give a boost to unloved “value” stocks, which have been out of favour for the past decade. This prospect is offsetting investor fears that the expected increase in corporate tax rates and regulations under a Biden presidency would weigh on stock markets.

Mr O’Connor said investors had always expected Mr Biden to spend heavily if he won. But with unemployment on the rise and the pandemic wreaking havoc on economies around the world, Mr O’Connor said investors “are beginning to focus on the fact that some of the tax hikes that were planned will probably be watered down”. 

“We will still get the spending, but less tax issues,” he said, which would be good news for US companies. 

Can value stocks bounce back from their poor performance in 2020?

Mr O’Connor has reduced his positions in US tech over the past few weeks, both because the sector has performed well and in expectation that a Biden administration will impose new regulations on tech companies.

Candriam, the €130bn assert manager, has cut its exposure to tech companies with low tax rates across its thematic portfolios, despite maintaining an overweight position to the sector.

Johanna Kyrklund, head of multi-asset investments at Schroders, the UK’s largest listed fund manager, is swapping some tech holdings for small-cap companies in anticipation of fiscal expansion if Mr Biden wins. 

“Tech has outperformed so much. There is a market that is itching to rotate,” she said. “I will be leaning away from Nasdaq right now.”

Asset managers are also adjusting their fixed income portfolios.

Adrien Pichoud, chief economist and senior portfolio manager at SYZ Private Banking, said the Swiss group was seeking to protect its portfolios from a sell-off in long-dated government bonds by pivoting into shorter-duration securities. The gap between yields on short-term bonds and long-term bonds tends to increase — a phenomenon known as a steepening yield curve — when investors expect stronger economic growth and rising inflation, as anticipated under a Biden administration.

Invesco multi-asset fund manager Sebastian Mackay has been buying option strategies to shield his portfolios’ exposure to longer dated US Treasuries at the time of the election, despite favouring these securities over the long term. Meanwhile Janus Henderson’s Mr O’Connor has moved money towards US regional banks, a play on the yield curve.

Line chart of Likelihood of victory based on betting averages (%) showing Gambling odds show widening lead for Joe Biden in presidential race

Some investors are re-evaluating their exposure to US healthcare stocks over concerns about the impact of potential Biden-led reforms of the pharmaceutical market.

Expectations that Mr Biden will invest heavily in green energy and infrastructure are spurring some managers to favour housebuilding companies. Rudi Van Den Eynde, head of global thematic equity at Candriam, is buying construction and building material stocks, as well as energy storage companies.

Despite the changes to fund managers’ portfolios, investors cautioned the outcome of the election was far from certain.

Mr O’Connor said: “If we get a divided house or a weak government, investors will be unhappy about that. They will sell assets. Markets will welcome a strong government of either side.”

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