Markets sold-off in late October as investor concerns increased due to the spread of COVID-19 in parts of Europe, the impasse on fiscal stimulus and uncertainty in the lead up to the U.S. election.
The ANZ Chief Investment Office believes the outcome of the U.S. election will set the near-term direction for equities, however the uncertainty around the potential make-up of congress is too great to be taking significant off-benchmark positions.
Despite Biden being declared as President-elect, Trump is yet to concede defeat and with counts in several states headed for court there is still risks in the near-term, including what actions President Trump may take between now and January – when Biden is sworn in.
With a “Blue Wave” now unlikely, Joe Biden’s promises of increased regulations and corporate taxes - which would be negative for equities - now appear less probable.
We believe that relations with China will likely remain strained, however Biden is expected to bring an improvement in trade relations with traditional U.S. allies and has already floated significant domestic infrastructure spends – which should be positive for the share market — provided they can pass congress.
Whilst fundamental factors suggest now is not the appropriate time to be adding further risk to portfolios, we expect the macro-economic environment to improve in Q1 2021 if vaccine trials and production continue to gather momentum.
We also expect monetary and fiscal stimulus - the current U.S. predicament aside - to continue to support markets in the short-to-medium term.
Investment outlook in brief
We shifted to neutral ahead of the U.S. election given the probability of increased volatility and uncertainty of the result’s impact on markets, regardless of who wins.
We also returned the hedging ratio for the AUD to just below benchmark to mitigate downside risk. We remain slightly underweight Australian equities but kept a marginal overweight to global equities.
We will wait for the dust to settle on the election news before considering future tactical positioning and potential increases to risk assets.
1. Comprises of 50/50 split between GREITs and infrastructure securities.
2. Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars. Representative diversified portfolio with 70/30 growth/defensive assets.
As at 1 November 2020.