Exposure rates of the Dorval Asset Management Range – 13th November 2020

With the US elections past and clear medical progress now being made on the pandemic, investors are able to look to the “post” world i.e. post-Trump and post-Covid.

The now concrete prospect of a vaccine amounts to the equivalent of a massive stimulus program that would run right throughout 2021, adding to both existing and planned monetary and fiscal support.

 

These effects will be accentuated by the fact that the world economy was already doing much better than forecasters had expected, as in both the United States and Europe, third quarter GDP posted showings that the OECD’s June projections had not anticipated until 2022. Momentum will of course fall back in the short term due to lockdown measures, but these figures testify to the world economy's robust rebound capabilities. The economy now has a good chance of making up the ground lost in 2020 much more quickly than expected in 2021.

 

Joe Biden’s election victory is good news
for emerging economies that are already recovering sharply
PMI business surveys in emerging markets

Services PMI / Manufacturing PMI

The US election results – with Joe Biden heading for the White House, but the Senate poised to stay Republican, although this will be confirmed or not in Georgia on January 5 – also help fuel this climate of optimism. World trade will no longer take such a beating from border duty meddling and presidential revenge tweets. The US administration will keep up the pressure on China, particularly when it comes to technology, but the elections should drive the recovery in Asia (cf. chart 1), which was already enjoying a more positive health situation than the west, and is highly exposed to world trade. Meanwhile, the US-Europe relationship will also be much more peaceable.

 

Looking to the markets, the absence of a Democrat blue wave is turning out to be a fairly stabilizing factor for Wall Street. The Senate will admittedly tone down US fiscal impetus, but this matter is now less crucial given that a vaccine is currently being developed. Democrats’ very narrow leeway may curtail the speed of movements on long-term yields (upward, cf. chart 2) and the dollar (downward), and will also avert a significant corporation tax hike and water down the regulation program for some sectors such as healthcare and digital.

 

Despite Joe Biden and the vaccine, US long-term yields are not rising too quickly

 

10-year Treasury yield

 

However, in relative terms, Wall Street is probably not the big winner in recent events. The Biden presidency and theme rotation resulting from the vaccine are better news for European and Asian stock-markets from a comparative standpoint, as they harbor more cyclical stocks that have been overlooked, and are broadly less vulnerable to the risk of sell-offs on the big winning stocks from the Covid-19 crisis (apart from China probably, where digital heavyweights account for a hefty portion of the market cap).

 

Rotation is still fairly limited for themes most closely related to the Covid crisis
Baskets of European stocks (source Goldman Sachs)

“Stay at home” stocks / Digitalization / STOXX 600 / Airlines / Tourism & leisure

In our portfolios, we have increased our equity exposure in response to the US election and announcements on the vaccination, while also ramping up the weighting of sectors that have been overlooked i.e. commodities, worldwide manufacturing, industries most affected by Covid-19. Despite the speed of recent movements and a continued poor economic outlook in the west in the very short term, we think that there is still considerable scope for these stocks to catch up over the months ahead, given relative valuations (cf. chart 3).

 

 

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