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How to invest with the US under President Joe Biden?

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The question I have to answer (that I bet you want an answer to as well) is: How do I invest with the US now under President Joe Biden? Like it or not, our market does play follow the leader with the New York Stock Exchange and the Nasdaq on Times Square.

We even follow sector by sector, with days when tech and telco sectors do well in the States that leads to similar moves here. On one level, it’s understandable. On another, the one based on actual company balance sheets and real business potential, along with the economic outlook for the country, looks a little screwy at times.

But it is what it is. I’ve always believed you have to play the game in front of you. So what’s in front of us?

 

Court challenges and run-offs in states like Georgia notwithstanding, I’ll assume:

  • Biden is President.
  • The Senate is controlled by the Republicans.
  • A bigger stimulus package will eventually show up, while a “skinny package” could hold the US over until horse-trading on Capitol Hill is completed sometime in 2021.
  • A bigger budget deficit happens in the US and the greenback falls in value and the Oz dollar rises over the next couple of years.
  • A vaccine becomes available in early 2021 and helps a solid economic recovery in the US and worldwide.
  • There will be a rotation out of fast-growing cyclical stocks (like tech) but these will still go higher, but not at the same pace as we’ve seen recently. This will favour stocks beaten up but likely to perform better as the reopening of the economy happens.

This is why Webjet, Flight Centre and Corporate Travel stocks did well late last week.

At home (as you know), we expect bank stocks to improve. The same goes for building and construction, which have already done well. You’d expect shopping centres shares to gradually go higher and REITS will eventually do better than expected, but until we see CBDs back to normal (and that could be at least six months), this could be a tricky place to play.

Clearly this Report will be looking for opportunities locally. But what about your overseas play?

Industry super fund statistics show what our top super funds put into overseas equities. And it might be useful for you to check your asset allocation against the professionals who have produced very good returns for decades.

At the end of the June 2020 quarter, 49.2% of the $1.8 trillion investments were invested in equities: with 21% in Australian listed equities, 24% in international listed equities and 4.1% in unlisted equities. Fixed income and cash investments accounted for 33.6% of investments: 20% in fixed and 13.6% in cash.

I bet most of you have nothing near 24% of your assets in overseas stocks but if you think you need to raise your exposure, here’s a few good ideas that might work under a President Joe Biden.

If you’re thinking about increasing your exposure to overseas shares, I’d be looking at funds that are long the rotation trade. And there are a few exchange traded funds (ETFs) that could be appropriate right now.

As the S&P 500 has been driven hard by the tech stocks and in particular, the huge FAANG stocks, I’d like to access smaller cap US stocks.

In August, Matt Bartolini from State Street Global Advisors found that midcap stocks (as measured by the S&P 400) have either faced smaller declines during market trouble relative to their counterparts, or have recovered faster from losses in the aftermath. (yahoo.com). (The S&P 400 is not a subset of the S&P 500, but rather a midcap index where stocks have a market cap of between US$2.4bn and US$8.2bn).

Consider these findings from the research:

  • 1997: The Asian financial crisis pressured markets around the globe. Midcaps led the recovery, with the S&P 400 climbing back to pre-crisis levels five times faster than small caps.
  • 2000: The dot-com bubble burst. The S&P 400 recovered four times faster than the S&P 500.
  • 2008: The financial crisis hit markets. The S&P 400 recovered two times faster than the S&P 500 and two months earlier than small caps.

“Midcaps have this flexibility and versatility, but also the strength to withstand being pushed around a bit,” Bartolini says. “Historically, over the last 25 years, midcap fundamentals have been strong — lower levels of debt relative to small caps, higher earnings growth than large caps. That results in a balanced and disciplined profile with some durability and strength, but also the aspects of growth.”

Since the March 23 U.S. stock market low, midcap stocks have actually outperformed or been very competitive with the S&P 500 ETF.

The SPDR S&P Midcap 400 (NASDAQ: MDY) is a case in point (see chart below). The same applies to the iShares Core S&P Mid-Cap ETF (ASX: IJH).

 

MDY six months

This chart shows how this US mid-cap ETF has performed and I suspect it should do well with any concerted rotation out of fast-growing tech cyclicals.

For diversity, I’d think about Magellan MGE, which has had a great 5-year track record. (There is also a currency hedged version, MHG)

 

MGE 5 years


And WQG, which has a different investment style but the fund manager has had fantastic returns investing in the US and overseas, looking for best-of-breed companies.

This shows how this fund’s flagship fund has performed over time.

I also think the US dollar is likely to fall this year, and for a few into the future, which is generally good for emerging markets funds. Here the Fidelity Global Emerging Markets Fund (ASX: FEMX) has proven to be a good performer.

The table below shows it has a solid handle on investing in Asia in particular. These guys presented at our investing strategy day and you can check out the presentation from fidelity's Anthony Doyle. 

 

And for those who want to just play the S&P 500, which should do OK, the cheap way is with an ETF like iShare’s IVV. But as I think our dollar will rise and the greenback will fall, I’d throw in some hedging, so I’d look at IHVV. It’s a little dearer than IVV but it might be worth the outlay.

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531). All prices and analysis at 3 August 2020. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.