‘Goldilocks’ election result offers boost for tech and healthcare stocks
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For stock investors, Goldilocks is the pick of the bunch when it comes to 19th century fairy tales.
In investing terms, the phrase refers to balanced market conditions that allow for a continuation of the status quo.
And indications are that the US election will provide such an outcome with regard to political risk.
Democrat candidate Joe Biden has all but won the Presidential race. However, the battle for the Senate has further to run and is leaning to the Republican side.
And a Biden presidency with a Republican-controlled senate is the ‘Goldilocks’ outcome from a markets perspective.
Randal Jenneke, head of Australian Equities at fund manager T.Rowe Price, explained it as follows:
“With a Blue Wave scenario all but removed, it is very unlikely Democrats will be able to raise US corporate and income taxes for higher income earners, and pursue the more controversial aspects of their progressive agenda,” he said.
As part of Biden’s policy agenda, the Democrats had flagged an increase in the corporate tax rate back towards 30 per cent, partially reversing Trump’s 2017 tax cut.
A Blue Wave would also free the Democrats to pursue a major stimulus package focused on infrastructure and jobs.
Both of those platforms — tax hikes and stimulus spending — were “critical policies which the markets, in our view, have been positioning for”, Jenneke said.
The final week of October prior to the election was certainly a jittery one, which saw the ASX Emerging Companies Index fall by around six per cent.
“The market was positioning itself for a ‘reflation trade’ driven by the prospect of higher inflation and therefore interest rates,” Jenneke said.
Such a dynamic may have given rise to a fundamental shift in equity allocation.
But with Biden in the White House and a gridlocked Senate, it’s a case of ‘as you were’ for global equity markets.
In other words, low rates for the medium term where high-growth tech stocks flourish, and the expense of traditional ‘value’ stocks.
“Within T. Rowe Price’s Australian equity strategy, we have been repositioned in favour of cyclical growth and recovery names such as IDP (ASX:IDP), albeit still holding a healthy exposure to defensive growth (Healthcare) and some extreme growth, in Xero (ASX:XRO).
“This positioning sees us well placed for the likely outcome of the US election.”
What it means for another round of US government stimulus — a stock market favourite — is slightly less clear.
But monetary policy makers are coming to the party, as evidenced by the RBA’s move towards quantitative easing on Tuesday.
And ASX small caps liked the vibe, as the Emerging Markets Index posted four straight gains from Tuesday onwards to reverse the previous week’s falls.