Last month we dialled down risk in portfolios to reflect slowing economic growth, heightened political risk and reduced visibility about the immediate outlook for markets. This change included reducing our overweight allocation to US equities to neutral, and closing our diversifying position in the Japanese yen. This month we’re waiting for more clarity about the timing of the recovery and holding steady. Although the US election is likely to dominate the news for the next few weeks, we’re looking ahead.

Governments and central banks continue to provide substantial fiscal and monetary stimulus and are committed to doing whatever it takes to support their economies. Health and social systems are improving all the time and becoming more effective at treating the virus. As a result, economies are adapting and should continue to reopen even before a vaccine is rolled out.

Looking to next year and beyond, markets can be influenced by the party of the presidency. Here, the possibility that the Democrats will win both house of Congress as well as the White House is important. Unified governments are able to create more legislation and laws that are more significant than divided governments. A Democratic clean sweep would probably be good news for the economy overall and some sectors such as infrastructure and healthcare, but could pose a headwind for others, including pharmaceuticals, financials, energy and technology.

On 3 November the American people will decide whether or not Trump will lose the presidency and many are concerned about the financial implications. Markets can experience an increase in volatility immediately around important political events. That said, historically, the macroeconomic backdrop has been a better predictor of market performance than the winning party over a three month horizon, so it’s important to consider the broader environment.

In the short term, economic activity around the world looks set to slow, as some countries are reapplying tight restrictions to counter a rise in Covid-19 infections. Although many of these measures are local rather than national, consumer spending and business confidence are likely to fall as a result. Yet, we continue to believe this setback is just temporary and that the recovery will gather speed next year.

Despite the sophisticated statistical methodology behind voter polling, betting odds are often an accurate indicator of electoral outcomes. As the chart shows, since pulling away in September, Joe Biden has built a substantial lead and stands as 2:1 favourite. However, the odds of the Democrats winning not just the White House but both houses of Congress as well, in a so called “clean sweep”, stand at just above 50%.

The nights are drawing in and the clocks have changed, making already short days seem even shorter. With the US election looming, Brexit negotiations ongoing and new restrictions for many, there’s a growing sense that things are probably going to get worse over the next few months.

Although we face short-term challenges, it’s not all bad news. Economic activity is likely to slow over the final quarter of 2020 but medical capacity has increased, vaccines are being tested and as political uncertainties resolve, the economy can recover with ongoing fiscal and monetary support.

As investors we must look forwards, always managing risks and assessing where we are in the economic cycle. We also believe it’s necessary to boldly envision the future to identify the trends that will transform our world. Last week we unveiled our new framework for assessing long-term themes. Learn more by watching the introductory clip below.

The global economic recovery is heading into a more challenging period, but don’t despair

Beyond the US election

COUNTERPOINT
NOVEMBER 2020

We’ve positioned portfolios for this early stage of the business cycle, where conditions are still challenging but look set to improve. Our strategy includes an overweight allocation to equities, specifically emerging markets equities. Within fixed income, we are overweight Europe’s high yield markets and emerging market bonds denominated in hard currencies. We combine this exposure with diversifying assets. These positions include investments in US government bonds and gold.