18 Nov 2020
The ‘relief rally’ following the result in the US election and announcements of vaccines were just a hint of what could be to come for US equities, as Cormac Weldon explains.
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It is still very early days since the announcement of Joe Biden’s presidency and the announcement of an effective vaccine for Covid-19, but the outlook for markets has brightened significantly.
The second week of November 2020 will be remembered for announcements which removed two huge uncertainties. Consequently, the instant rally which followed was driven by the removal of negative factors which had begun to be priced into the market. An additional positive from the election – at least from a market perspective – is that the Senate will likely have a Republican majority. This limits the possibility of Biden being able to introduce some of the progressive measures he had pledged. Increased taxes and the introduction of a $15 minimum wage, for example, have become a lot less likely for the foreseeable future.
Vaccine as a stimulus
More broadly, news of the vaccine should mark a turning point in the battle against Covid-19. There had been disappointment about the lack of political progress in agreeing a new round of US economic stimulus. But assuming Pfizer’s announcement is verified through further data and other vaccines become available, this will be a strong stimulus for the US and global economies.
There is still a long way to go before returning to what we saw as normalcy. Cases of Covid-19 are rising in the US at present. But the size, diversity and federalist constitution of the US means there is unlikely to be a national lockdown. On top of this, the Federal Reserve remains very supportive of economic growth and we would expect them to provide support to the extent that it’s required.
A cyclical recovery
The week’s news builds on what was already a positive economic backdrop. The US economy was doing fine. Better than most, including us, had expected. Employment data has been robust and the latest earnings season has so far shown revenues roughly 3% ahead of consensus and earnings around 20% ahead of expectations – albeit that those expectations were somewhat pessimistic.
The initial rally in cyclicals benefited companies of lower quality whose share prices had been beaten down during the pandemic. While it makes sense that these would rebound somewhat on news of a vaccine, many still have challenged business models.
Financials and the consumer
We believe it is more appropriate to have exposure to retailers which are more insulated from Amazon, and financials which will benefit from a revival in consumer spending. Burlington Stores, a ‘bricks and mortar’ retailer, is an example of the latter. It offers deep discounts on fashion lines and relies on customer visits rather than e-commerce.
In financials, Discover Financial Services, a credit card company, should benefit from a return to consumer spending and lower defaults by customers as the recovery takes hold. We also own Fidelity National which provides payment systems and we expect it to benefit as demand returns for offline retail. All that said, we remain overweight Amazon because of its relationship with the consumer. And we are overweight Facebook, which will benefit as retail and leisure providers reactivate their advertising now that an end to the pandemic is closer.
Rebuilding inventories
We believe industrials and materials will be among the primary beneficiaries of a reviving economy. Unlike typical recoveries from recessions, inventories are low. These will normalise as the economy recovers, which will require more imported goods and increased manufacturing and production. This inventory needs to be moved around the country – whether that is to third-party distributors or directly to the consumer. Norfolk Southern (railroad) is an example of the type of company we believe will benefit from this increased activity. Another stock we hold is Linde, an industrial gases company which is not the most levered to the industrial recovery but will benefit from increased interest in hydrogen as an alternative fuel.
Towards recovery
Overall, the picture for investors is brighter but the recovery is likely to be uneven. Some sectors will continue to be disrupted by technology, particularly department stores and retailers. We don’t expect air travel to be back to normal before 2022, or perhaps later.
Recreation and restaurant activity will return but there are many steps between the current lockdowns and plazas full of carefree consumers. Employment data has been impressive to date but will soften in the short term. That said, job creation in stronger sectors – manufacturing, housing-related, technology, health care, grocery stores – should absorb some of this weakness.
Our skew towards a cyclical recovery is specific for the above reasons. Low inventories and the need to manufacture and distribute goods are likely to be the first drivers of the recover, with the re-emergence of consumer demand adding a powerful second phase.
To find out more about the Artemis US Select Fund and Artemis US Smaller Companies Funds and their positioning visit the fund page at www.artemisfunds.com.
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
Artemis US Select Fund
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
The fund is a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
Artemis US Smaller Companies Fund
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
The fund is a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.