Debate? What debate?
As the US election approaches, we have once again seen sparks of market volatility.
CNN commentator John Avlon suggested that "Presidential debates are supposed to illuminate, create clear contrasts and show the strength of our democracy.” As outsiders subjected to whatever that debate was, we will not pass judgement on the strength of American democracy, per se. Markets, however, passed their judgement, and the impact was increased volatility this week and heightened wariness leading into the November vote.
But the rancour of the debate was only a backdrop to the political conjecture that is more relevant to US markets: the current impasse regarding the proposed 2nd round of fiscal stimulus. The American penchant for waiting until the last moment to do the 2nd best thing is stretching the patience of the US market. The market is perfectly aware of the need to support the incomes of those most impacted by COVID. However, the fiscal gridlock is creating perverse outcomes - the less likely stimulus becomes, the more the market herds back towards speculative growth stocks (that it only just sold down in recent weeks).
Our view on the impact of the US election is mixed. On the one hand, a Biden victory could mean higher corporate taxes and have a negative impact on market sentiment. On the other hand, a Biden sweep of the House of Representatives and the Senate could result in stronger support for the domestic US economy that would be positive for nominal growth. Regarding our direct exposures through QBE, Intega and James Hardy, a Democratic victory would be preferred.
In Australia, we saw additional backing from our elected representatives and regulatory bodies. Ongoing fiscal (government) support for the economy across a range of measures continues. This has been evidenced by unequivocal extensions of income support, and assurances regarding the provision of support until employment returns to pre-COVID levels from the Reserve Bank. Australia has thus avoided the worst of the political inertia regarding government stimulus.
This week we saw extensions to research and development (R&D) tax concessions to assist with a recovery in business investment post COVID, along with the relaxation of responsible lending legislation. Neither changes are perfect - there were reasons to tighten R&D concessions, and lenders do have obligations to borrowers. However, context is everything at this point.
Unlike the US, where the simplest aspects of COVID are politicised, the Australian response has built significant force behind a future recovery. This will not guarantee the pace of recovery, nor change the fact that there will be clear winners and losers created by the events of 2020.
We continue to be positioned for a market in which this support has created stronger nominal growth conditions in the coming years. We have seen stocks such as Boral, Bapcor, Costa Group and Cardno respond to improved conditions and prospects for the medium-term outlook.
In addition, volatility has provided some clear opportunities in recent weeks to trim positions that have become extended (James Hardie and Mineral Resources), and add to positions (Worley, Woolworths and Newcrest Mining) that have been unduly sold.
And while some of the present uncertainty does justify the volatility we have seen in the overall market; the volatility of individual stocks is a little more curious.
Carbon Revolution provides a good example.
The company has faced its share of challenges during the pandemic. However, this has been at odds with the volatility we have seen in its share price – which has almost doubled over the past month despite an absence of news.
This highlights that during these periods of market nervousness, we can see strange share price movements that do not necessarily reflect a change in fundamentals. We didn’t believe the depth of the price falls were justified (and hence bought more shares) and are similarly wary of steep rises.