Weekly View - And the winner is…
The positive response of equity markets to the conclusion of the US election can be put down to some degree to relief a traumatic electoral campaign has ended and, more substantially, to the probability of a divided Congress. The likely regulatory gridlock that will ensue reduces greatly the prospect of a reversal of Trump-era tax cuts and of tougher regulations for business. With bond yields also down, all this is good for Big Tech. Although fading prospects for a major fiscal stimulus might prove a brake on more cyclical sectors for the moment, we continue to like tech and structural growers in areas of healthcare, such as biotech, pharma and life sciences.
US growth could be prosaic at best in the absence of a substantial fiscal package. Fiscal stimulus or not, the Fed can be expected to intervene in the weeks ahead as a new wave of covid-19 hits US shores, clouding the short-term outlook. Meanwhile, defensive currencies such as the yen are benefiting from dollar weakness, fully justifying our recent decision to purchase USD/JPY puts, while select emerging-market currencies could benefit from more stable US trade and foreign policies.
Third-quarter earnings were much better than expected. The outlook for Q4, however, remains hazy as covid-19 cases increase rapidly, particularly now in the US. Daily cases there have risen to over 120,000 after record numbers of new cases on four consecutive days last week. We could soon have a situation where Europe manages to get the virus under control again before the US—with implications for growth and for financial markets. Against that background, we expect both the Federal Reserve and ECB to move in the coming weeks.
The sudden withdrawal of Ant’s IPO shows that regulatory considerations in the area of fintech are evolving fast and is a reminder that all interests need to be aligned when investing in IPOs. Nonetheless, Chinese markets are soaring as the recovery of Chinese economy continues apace. We maintain our enthusiasm for Chinese assets, including the renminbi.