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Focus on COVID-19 Recovery, not Politics

  • Democrats won control of the US Senate for the first time in six years with victories in two runoff races in Georgia - a result that had not sent a new Democratic senator to Washington for two decades. The Senate is split 50/50, with Vice President Harris to be the tie-breaker. This could open up a lot more possibilities for the Democratic legislative agenda in the coming two years, such as stimulus, infrastructure, taxation, and regulation. The flip of Georgia runoffs has led to unrest in the US Capitol. The Capitol was declared secure four hours after the building was stormed, forcing debate on President-elect Biden’s victory in the Electoral College to be suspended.



US-China Tensions: Delisting of ADRs may lead to a subsequent rally in Hong Kong

  • The New York Stock Exchange (NYSE) proceeds with delisting Chinese telecom companies. MSCI announced plans to remove these companies from its benchmarks by January 8 while S&P Dow Jones also announced its plan for removal by January 12. There is concern that Chinese oil companies may eventually come into the delisting scope.
  • Despite the exodus of US investors, there may be subsequent inflows from China and others who see the telecom and oil names as value plays with significant dividend yields, amid a global reflation trade. The Chinese telecom and oil names have been major laggards and many of the Hong Kong listed names have dividend yields of 7-9%. Chinese investors, including government controlled funds, may capture this opportunity in the Southbound channel, which may take place when the US related selling slows down after delisting.
  • The US administration continues to talk about banning investment in Chinese technology giants, though these efforts may not be implemented in the remaining days of the Trump presidency, and is less likely to be executed with urgency by the incoming Biden Administration. The primary issue still lie with Chinese regulators, which remains uncertain, though these concerns have already unwound the performance in 2020.





Implications for portfolios

  • While political news causes markets to rise or fall, the impact of government decisions is likely to be priced in swiftly. Citi analysts caution investors to follow vaccines, not politics. Despite the uncertainty associated with global government actions, COVID-19’s eventual defeat remains the major factor that may drive investment returns in 2021-22.
  • For example, as demand for travel and leisure improves in the coming months, oil prices and therefore energy stocks could continue to rise over the short-run, even as President Biden focuses on climate change. Similarly, the improvement in macro and credit fundamentals, driven by both stimulus and effective vaccines, could boost bank stocks even if more regulation and higher taxes loom in 2022.

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