Asset manager assesses White House battle and explains why investors should consider upgrading both equities and bonds
The hype train is building speed as we prepare to turn into 2020. Will the Democrats unearth a candidate with the savvy to find a way to the White House? Will the incumbent, President Donald Trump, tweet his opponents into submission and secure another four years?
Nobody knows, of course, but one thing Capital Group does know is that it will make absolutely no difference to clients’ long-term investment.
In the firm’s outlook for 2020, it highlighted the pivotal presidential contest in November, stressing that the most important thing is to stay invested.
Looking at U.S. election results back to 1932, the country’s stocks have trended up regardless of whether a Republican or Democrat won the White House. Investors who held on for at least a year were rewarded for their patience, though they had to withstand heightened volatility during the primaries.
Capital believes that election-related volatility can, in fact, produce select opportunities. U.S. pharmaceutical and managed care stocks have recently come under pressure amid political criticism of private sector health insurance. That, in turn, has resulted in some attractive company valuations for investors who believe that a government takeover of the U.S. health care system isn’t imminent.
“Investing during an election year can be tough on your nerves,” explained Capital Group portfolio manager Greg Johnson, “but it’s mostly noise, and the markets carry on. Long-term equity returns are determined by the value of individual companies over time.”
With regards to global economic growth, it’s slowing thanks to macro turmoil like the damaging U.S.-China trade war, political upheaval in Europe and violent protests in Hong Kong. Nevertheless, Capital believes there are equal and opposing reasons to be cautiously optimistic about 2020.
The reasons include “powerful catalysts for change” like a U.S.-China trade deal (even a limited one); a Brexit resolution; and a return to normal levels of manufacturing activity as companies begin to invest again in a less uncertain world.
“In the meantime, investors should remain focused on the long term and try not to get too caught up in the day-to-day headlines,” according to portfolio manager Jonathan Knowles, who has a front-row view of the global trade environment from Capital’s Singapore office.
“The whole world is messy right now and we’ve just got to deal with it. We’re living in incredibly disruptive times — politically, economically and socially. Our job, as investors, is to find companies that will prosper no matter which way the macro winds are blowing.”
Capital’s key takeaways include:
MACRO
Stay balanced in this U.S. election year
“Patient investors can do well in election years. We looked at every U.S. presidential election since 1932 and found that primary seasons are volatile, but markets have notched solid gains afterward. It may be better to stay invested than sit on the sidelines. Recession in 2020? Not if the consumer stays this strong. In the U.S., it’s a tale of two economies: Consumer strength should continue to offset the manufacturing slowdown caused by trade and policy uncertainty.”
EQUITY
Consider upgrading
“The best offence is a good defence. It’s not too soon to prepare portfolios for rougher seas ahead as we face headwinds from a U.S. election year, a slowing global economy and late-cycle markets. Look for sustainable dividends, not just “value” investments. The value label can be misleading because it‘s not always defensive. It’s better to select companies that can sustain dividends when times get tough. Think the best stocks are in the U.S.? Think again. Over the last decade, most of the top 50 stocks were non-U.S., even though the U.S. index did better overall. It’s about selecting companies, not indices.”
FIXED INCOME
Consider upgrading
“It may be time to revisit your bond allocation. Given the late-cycle U.S. economy and weakness abroad, your fixed income allocation should be mostly higher quality core bonds that can help mitigate stock market volatility. Consider complements to high-yield corporates. Emerging markets bonds have offered similar income potential to high-yield corporates — often with lower correlation to equities.”
