Despite positive indicators, stock strategists urge patience

They cite push factors from tech innovation, central bank easing and new trade relations once clarity emerges


FLUSH from a V-shaped market rally since the market trough in March, portfolio strategists for wealthy clients remain "constructive'' on risk assets such as equities and credits.

But clients are broadly advised not to pull the trigger yet on cash balances, while volatility remains elevated and until the outcome of the US presidential election is clear.

There are a number of common threads in private bankers' views: US dollar strength is expected to wane, which is likely a positive for Asian and emerging market equities. The Democrats are expected to make a "clean sweep'' - which means Joe Biden as president and control of the House of Representatives and the Senate - paving the way for reflationary policies in the form of higher fiscal spending. This is also a positive for equities and the emerging markets.

Eli Lee, Bank of Singapore head of investment strategy, said: "We have a neutral overall positioning in terms of equities. But we're telling our clients to take a constructive view of the turbulence ahead… We're looking to buy opportunistically. I think the scope for volatility is pretty significant.''

While higher US corporate taxes are expected with a Democratic win, DBS chief investment officer Hou Wey Fook says the positives arising from higher fiscal spending "will partly offset the negatives of higher taxation and the eventual impact on US corporate earnings will be negligible''. He continues to advocate a "barbell'' approach, which means invests in long term growth trends on one end and stable income on the other end, with exposures to gold and bonds as a downside hedge.

"We advise investors to stay invested simply because the tailwinds from technological innovation and central bank monetary easing far outstrip the headwinds. ''

Year-to-date Bloomberg data shows China as the outperformer with returns of 15 per cent based on the Shanghai Shenzhen CSI 300 Index, as success in quelling the Covid-19 outbreak and a return to almost pre-pandemic economic activity have spurred an upward re-rating. China's economy surged 4.9 per cent in the third quarter, bringing growth for the first three quarters to 0.7 per cent.

Credit Suisse chief global strategist Walter Edelmann wrote in a strategy note that the CS investment committee maintains "positive absolute views'' on cyclical assets such as equities, credit markets and commodities. While equities are expected to do well in the medium term, "the committee sees it as prudent not to raise equity allocations above strategic levels at this juncture''.

This is because apart from current uncertainty over who would ultimately win the US presidency, there is also the possibility of a contested result. What's more important, he wrote, is whether the elections would result in a "sweep''.

"We believe investors are well advised not to rush to commit new money to equities. In case of a 'sweep', the chances of a more meaningful stimulus package appear better, which could become a catalyst for stronger markets. Conversely, continued deadlock could make markets baulk.''

Kelvin Tay, UBS Global Wealth Management regional chief investment officer, says an outcome of a unified US government regardless of who is elected president would be more favourable to emerging market assets than a divided government.

"An environment of higher fiscal spending, faster economic growth and higher inflation expectations is typically more supportive of EM assets. On the other hand a divided US government - one that makes enacting tax and spending legislation more difficult - would likely result in a more muted impact.''

He expects status quo in US-China relations should Donald Trump win. A Biden win may reduce uncertainty around US external policy, which is again positive for EM economies.

In terms of trade relations, he said it is likely that Mr Biden would be less willing than Mr Trump to use tariffs as "an overt tool of foreign policy, and is more likely to revert to a globalist approach'' when dealing with trade partners. These two factors are supportive of EM assets.

Deutsche Bank International Private Bank has created two "high conviction'' idea baskets for clients who may want to position themselves around the US election. Chief investment officer Tuan Huynh said risk positioning, however, is neutral for US and European equities where "upside remains limited because of relatively high valuations''. The bank is also neutral on Asia ex-Japan equities.

It has an overweight call on Chinese equities due to the steady recovery, pro-growth fiscal policies and relatively low valuations. The bank's Biden basket includes US equities sectors of clean energy, medical equipment, healthcare facilities and infrastructure. The Trump basket includes managed care, banks, information technology, communication services and energy.

Norman Villamin, chief investment officer (wealth management) of Union Bancaire Privee, said the bank used the summer rally in equities to build protection in portfolios to allow clients to hold and build positions in high quality and long-cycle transformation assets, such as healthcare and technology. "Diversification and rotation are warranted given the rally.''

He said green and climate change themes appear well priced, suggesting expectations of a Biden win. But the US dollar market and gold "are not fully pricing in a Biden victory where fiscal stimulus and Fed debt monetisation should benefit both''.

Still, the bank has an underweight on the US dollar. "We believe we are still in the early stages of a longer cycle USD bear market. Fiscal stimulus and debt monetisation should be the catalyst to the next leg of US dollar weakness.''

Citi Private Bank notes that long term US interest rates have perked up slightly over the past month, which suggests that rates may go higher when a medical solution is found and a broader economic expansion becomes certain.

The bank expects "digitisation innovators'' to experience stronger long term growth rates than the broader US economy, and represent an "unstoppable trend''. "However 2020 and 2021 should be considered distorted years given Covid's arrival and likely departure.''

Video conferencing, for instance, will continue to grow, but if there is a Covid vaccine, it may be hard to exceed 2020's 250 per cent growth rate. "That is why beaten-down industry sectors, in contrast to those that have surged, represent a stronger tactical opportunity for 2021...''

In the event of a Democratic sweep, it said markets may swoon. "Fears of higher taxes, higher spending and increased regulatory action may be the cause. We would view this as a buying opportunity for equities.''


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