Summary List Placement
No matter how many things complicate the campaign, modern presidential elections in the US have binary outcomes where one major candidate wins and the other loses.
But investing based on what happens in those elections isn’t that simple, as evidenced by the huge number of theories and trades that tell investors what to do based on the wide range of possible governments the country could elect in November (or December or January).
That’s one reason David Bianco of DWS Group cautions against making dramatic changes once the results are finally out. Bianco is the chief investment officer of DWS’s Americas unit, which has about $229 billion in assets under management.
“I don’t think you should increase equity allocations, and I don’t think you should reallocate from growth to value,” he told Business Insider in an exclusive interview. “I think you should stick with the portfolio that you’ve had the past few years.”
Today he recommends that investors have 55% to 60% of their portfolios in stocks, especially US large cap, with a 30% to 35% allocation to fixed income and about 10% in alternatives. But he’s not telling clients to stand pat because he thinks things look promising for the market. He’s suggesting that there’s a lot of downside to be avoided.
Bianco thinks the country is heading into a period of sluggish growth, projecting that the economy won’t fully recover from this year’s recession until the end of 2021 and that GDP growth after that will hover in the range of 1.5% a year.
That will weigh on stocks, as he thinks the S&P 500 will trade at about 3,300 in late 2021 — 5% below its current levels. In that low-growth environment, he says investors should buy tech and healthcare stocks.
“Sales and earnings growth will be healthy in tech and healthcare regardless of who’s in the White House,” he said.
While some experts worry that those two sectors would face greater regulatory risks and new rules under a Democratic government, Bianco says that both sectors have faced major political challenges in recent years and the stocks have continued to perform well.
Energy companies and banks face even greater political headwinds, which is a key part of his argument against treating a Democratic win as a reason to buy value stocks.
“I’m certain some of these politicians have something to say about tech companies operate and maybe what the taxes will be, but it pales in comparison to the political and policy risk that the energy and the financial sectors face.”
Bianco also says credit spreads are a more appealing option than value stocks. In a recent blog post, he noted that spreads are unusually wide by historical standards, meaning investors would benefit if financial conditions tighten to more normal levels.
Returns get routed
He also thinks returns could get harder to find as a win for former Vice President Joe Biden will create new risks to dividends. Biden has proposed raising taxes on dividends for high-income filers, and if that proposal were enacted it might reduce the appeal of some big-dividend stocks.
Bianco says that’s one of several powerful factors that makes him bullish on utilities, which are known for high and steady yields. He prefers regulated electricity producers to unregulated and natural gas utilities.
He says they’ll also play a big role in federally-backed infrastructure spending that could include the green energy programs, the 5G rollout, and charging stations for electric cars.
“I like utilities as an infrastructure play, I like utilities as a Democratic sweep play, and I like utilities as a low interest rate play,” Bianco said.
He’s also optimistic about municipal bonds, a sector that’s been popular in recent years and might only get hotter if those bonds gain further tax advantages over other forms of dividends. He says that state municipal bonds are broadly safe, as the risks are concentrated in certain cities and agencies.
“I expect municipal bonds to benefit from more federal aid post-election,” he said. “Our preference at this moment is to stick with the higher quality, general obligation state bonds for the most part.”
If Democrats win full control of the government, Bianco says he would take a more expansive approach to the sector because a Democratic Congress would likely pass a larger stimulus package that would send more money to large cities and municipal transportation agencies.
For an investor who wanted to bet on that outcome, he says, “I would say ‘go buy all the revenue-backed municipal bonds, including airport and mass transit muni bonds. … “I would lean toward the higher-yield muni bonds, which are basically mostly transportation oriented.”
He adds that Wall Street will wait to see what proposals emerge from the next Congress, so a rally in municipal bonds might not happen until January or February — giving investors who like the notion plenty of time to put a strategy in place.
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