US | Equities

Looking Beyond the Uncertainties

_{Posted on Nov 2, 2020}

Markets no longer anticipate a protracted battle to determine the US Presidential election results. However, Citi analysts do not think this marks an “all clear” for markets when looking at the immediate aftermath of the US election.

US political regime changes are a big deal and there is much to absorb from Congressional results, particularly the margins of control to determine what is eventually possible in terms of tax policy changes and government spending. The tone taken by the losers and winners in the election aftermath are important to understand any possible fiscal response to COVID-19 in coming months.

As we saw in 2016 amid the UK’s Brexit referendum and US Presidential election, any kneejerk reaction to results in the day or days after may not necessarily be indicative of longer-term trends. Markets are likely to sooner or later move in the direction of impending fundamentals.

Over the near-term, there is a strong possibility of a winter slump or lull in Western economies as COVID-19’s acceleration creates a greater burden. Underlying trends, however, point toward a global recovery in trade and industrial activity. Citi analysts also expect a COVID-19 healthcare solution to drive a sharp rebound in discretionary services spending by later in 2021. This is likely to mark a far more complete recovery, which could dominate investment returns by the end of next year.

Conversely, COVID-19 infection rates have remained dramatically lower in much of Asia. The International Monetary Fund (IMF) forecasts a near-double-digit gain in global trade volumes in 2021, close to a record pace. US consumer purchases of hosing and recreation merchandise have surged at the expense of “socially-close” services. Benefiting are products that China exports in mass quantities. The shift has arrested a drop in US imports from China due to the 2018-2019 trade tensions. China’s industrial production and broader trade growth have accelerated, with overall exports to all trading partners up almost 10% from a year-ago in September.

Broadening away from China, other Asian economies appear well positioned for the trade and industrial rebound expected in the first half of 2021. As such within equities, Citi’s Global Investment Committee is overweight on Asia in emerging markets, in addition to Latin America. Large-cap US equities are neutral, while US and global small and mid-caps are overweight on their potential to recover post COVID-19. Real Estate Investment Trusts (REITs) are also preferred.