What will a Biden Presidency mean for US & Global financial markets
Despite the somewhat shocking recent scenes in Washington, which many have attributed to the worsening of that country’s polarization, other events including the presidential election may have in fact partially restored the centre ground. Trump lost the November election but so did the far left of the Democratic Party when Biden was preselected rather than someone more radical like Bernie Sanders. Biden’s long track record and his early Cabinet appointees confirm that he favours the middle of the road. Biden didn’t sweep to power on a blue (Democratic) wave; many voters who didn’t support Trump nevertheless voted for Republicans in the House and the Senate. More recently, but for Trump’s foolish and wholly unsuccessful attempt to overturn the election result, the Republicans would likely have won in Georgia and held the Senate.
So being a centrist Democrat with only a very small Senate majority (the casting vote of VP Carmilla Harris), expect Biden to propose greater fiscal support for individuals and businesses as the US recovers from the Covid-19 economic downturn, but nothing too radical. The more conservative Democrat congress members are unlikely to support anything too radical.
With monetary support in the form of low interest rates basically exhausted, economic stimulus will have to come largely through further government spending and financial markets appear supportive of that. In the medium-term government support will have to be reduced but financial markets are comfortable that neither monetary or fiscal support will be withdrawn too quickly so the consensus outlook for the US economy and share market remains moderately positive even if US equity valuations do look somewhat stretched.
Are we in a stock market bubble?
Some very highly credentialed investment experts, like Jeremy Grantham from Boston-based fund manager GMO, believe that we are currently in an investment “bubble” with share prices well above intrinsic or fair value. Normally investment bubbles occur when the economy is booming, which clearly isn’t the case today, so this time is different if we are in fact in a bubble. There is no question that very low-interest rates and Government spending have pushed up asset prices, like shares and residential property, but that’s not conclusive proof that we are in a bubble and prices may keep rising for the foreseeable future as interest rate rises seem unlikely. Low-interest rates are certainly encouraging savers to look at options other than bank deposits.
If it turns out that we are in a bubble and that it bursts, as they all do eventually, remember that many of the great opportunities for investors come in periods of panic, as we experienced most recently in March 2020. It is hard to invest when all the news is bad, but history shows that this is when the best opportunities arise.
It is always difficult, if not impossible, to know whether we are in a bubble and when a correction is coming – who predicted the coronavirus recession a year ago? – but for long term investors, this doesn’t matter too much as markets recover and typically reach new highs within a few years, or sometimes sooner. While clearly, assets are not cheap today, and price volatility is highly likely in 2021, that’s not an argument for being overly defensive, particularly when returns on cash and bonds are so low.
The risk that Covid-17 Vaccines won’t necessarily end this epidemic soon
Financial markets are assuming that the roll-out of vaccines will be successful and end the health and economic disruption caused by Covid-19, which obviously would be great news for everyone. However, there is a real risk that mutations will render the new vaccines ineffective and if that happens, we will undoubtedly see the disappointment reflected in lower share prices as confidence would take a big hit.
Several mutations to the Sars-CoV-2 are provoking concern among scientists who are scrambling to work out if they will still respond to vaccines. One mutation, known as E484K, detected initially in South Africa and in Brazil and Japan, has raised alarm among researchers. Ravi Gupta, professor of microbiology at the University of Cambridge, said it is this mutation — and not the much-covered British variant — that is “the most worrying of all”.
ADVERTISINGAlthough research into the new variant is limited, a new Brazilian study looked at a patient who had recovered from Covid-19 only to become reinfected with the new, mutated strain. The authors found that the E484K mutation could be “associated with escape from neutralising antibodies” — meaning it could bypass the body’s natural defence memory that bestows immunity.
Let’s hope the new vaccines being rolled out globally will remain effective as new mutations occur but the possibility that they won’t is a real but unquantifiable risk both to our health and investments.
A New Team member in Sydney – Helen Houston
Andrew is pleased to welcome Helen Houston as a new team member in Sydney. Helen is originally from the UK and has a strong interest in Pilates as well as a background in sailing.
Changes in the Financial Planning Industry
Financial planners continued to exit the wealth management industry in 2020, with the biggest falls being at AMP and the banks which have largely withdrawn from the financial planning industry. Data from research firm Rainmaker says the total number of financial advisers in Australia fell by 12 per cent in 2020 to 20,880. The decline is primarily attributable to increasing regulation of the industry, which has been putting upward pressure on the cost of advice and also to increasing educational requirements. Financial Planning Association (FPA) CEO Dante De Gori says that reducing the regulatory impact of eight separate regulators and competing regulations on financial planners would have a significant and positive impact on their ability to service more Australians.
Tesla, an example of some highly questionable company valuations
Tesla was recently added to the S&P 500 and is now, as this chart shows, valued significantly more highly than the rest of the world’s major automobile producers combined. With its share price now around US$830 (up from $705 since Dec 31) and with a market capitalisation over US$800 Billion, the gap between Tesla and the rest of the auto industry has expanded. Tesla is the market leader in electric vehicles, but you don’t have to be a Tesla critic to question whether this valuation makes sense. The company sold around 500,000 vehicles in 2020, giving it a global market share of less than 1%. Despite its huge market cap, it is currently a small car manufacturer and will have to grow enormously to justify the current market valuation. This is simply one example of a high growth technology business that investors and speculators have pushed to seemingly extreme valuations.
Tesla vs Other Carmakers Jan 2021
As an aside, Tesla founder Elon Musk is now the richest person in the world, at least on paper. Amazon founder Jeff Bezos would still be in the lead if had he not recently divorced.
In the Australian market, Afterpay, with a valuation over A$35 Billion, and Xero with a market valuation of $20 Billion, are other examples of businesses with a huge amount of future growth in profitability already built into the valuation. These are good businesses, but history shows that businesses acquired in times of great optimism and with extreme valuations that assume durable high levels of growth are likely to produce modest returns, at best, for new investors. Of course, my view may be reflective of the fact that I passed on the opportunity to buy Tesla and Afterpay when they were far cheaper than today, and I sold Xero way too soon.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.