NewsThe Biden-Vaccine Rally And What It Means For Investors

November 11, 20200

The Biden-Vaccine Rally And What It Means For Investors

Against this backdrop of arguably one of the most chaotic and unpredictable years in modern history, we are pleased to report that since 01 Jan 2020 our Unicorn Fund returned over 60% in ZAR and our Altos Fund returned 14% in USD

We have seen this as an opportunity to increase our exposure to USD Assets and take advantage of the weaker USD and tech prices. While the ZAR could strengthen more in the short-term, our view over the longer-term is unchanged: we expect the ZAR to weaken and for global tech companies to provide the best growth opportunities.

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It’s been an incredible week or so for the markets. In the space of just a few days, we’ve seen a significant political shift in the United States and the announcement of a major breakthrough in the fight against Covid-19.

Markets have rallied strongly over the past 10 days or so, although there’s been an interesting difference in the shape of the rallies on the NASDAQ-100 (tech heavy) and the S&P 500 (diversified industries). 

The significant asset allocation shifts seen in the wake of the vaccine news are also worth discussion.

The Biden relief rally

Both the S&P 500 as well as the NASDAQ-100, along with global markets, rallied in response to Biden’s victory last week. One wouldn’t normally associate a Democrat victory with a stock market rally, but this year has been far from normal. 

Democrats are all about higher social grants, more regulation and tax increases – these aren’t business-friendly policies under most circumstances. The current situation is different, though, as the market has been propped up this year by extensive stimulus packages to keep economies afloat.

The prospect of further stimulus has been cheered by the market, especially as we can now expect tax increases to be limited in a situation where the Republicans still control the Senate (at this stage the likely outcome). Remember, in the build up to the election, it was the Democrats pushing for a higher stimulus package while the Republicans dug their heels in.

Of course, stimulus has to be serviced through tax revenue and so these issues cannot be divorced from each other, but some balance in the U.S. structure from a split Congress (a Democratic House and a Republican Senate) may limit tax increases, while providing higher stimulus than Republicans would otherwise have been in favour of.

The counterargument is that a split Congress could result in gridlock. CNBC reports that 92 years of data shows that the average return in split Congress government years is 6.1% vs. unified government years at 9.3%.

While the timing is awfully convenient for the new ruling party, global markets seem to be pleased with Trump’s loss and the simultaneous news of the Pfizer vaccine. His confrontational approach and his trade war with China rocked the global economy. Emerging markets such as South Africa should see marked improvement under a Biden administration as compared to a Trump administration, especially if the Chinese economy benefits as expected. Evidence of a global shift to a “Risk-On” environment can be seen in the USD and Gold price weakness. Locally we witnessed this as a dramatic rally in the Rand over the past week.

The impact on Big Tech isn’t clear

It’s slightly surprising to see how the tech-heavy NASDAQ-100 also rallied in response to Biden’s victory. 

Purely from a tech perspective, the risk for particularly the FAANG and related companies is that the Antitrust Subcommittee has been a Democratic-led initiative. Biden’s administration will probably be less partial to oligopolies dominated by platform businesses in seemingly unassailable positions. 

Would Biden’s administration have banned TikTok, effectively protecting U.S. tech giants through mistrust of China? Possibly not.

Relaxing the trade war may give short-term support to U.S. chip manufacturers (who were supplying China) and companies like Apple that experienced an increase in iPhone supply chain costs from the introduction of trade tariffs. Having said that, our research on China shows an incredibly well-thought-out 5 year growth plan that features domestic chip manufacturing, 5G smart cities and a shift from producing low-end products like cheap clothes and toasters to high-end electrical goods and vehicles. 

The net impact on Big Tech isn’t clear at this stage. It’s a situation that investors will continue to monitor closely.

The vaccine rally

The news of the Pfizer vaccine’s promising results was enough to thrust global markets strongly into the green. Interestingly, the S&P 500’s rally was far stronger than the NASDAQ-100. 

Lockdown has been great for most tech companies. When people cannot move around freely or engage with each other in person, technology becomes the only enabler for people to live their lives and earn an income. As the world moves past the nightmare of Covid-19, traditional industries like travel and oil are expected to stage a recovery.

Most tech companies have solid prospects beyond lockdown, but others like Zoom will struggle to justify their valuations. Zoom dropped around 14% in response to the vaccine announcement, which is still less than the pain experienced by several leading gold stocks.

As the risk-on trade reverberated around the world, safe-haven asset demand fell and gold lost its shine (as did the US Dollar). The combination of a strong Rand and weaker gold price sent local gold counters into a tailspin. The likes of Harmony, AngloGold Ashanti and Goldfields all dropped more than 15% on the day of the vaccine news.

Anything related to oil, travel or restaurants did well. Locally, Sasol and Bidcorp were among the top performing shares on the JSE after the announcement. Globally, companies like TripAdvisor and Carnival Corporation (cruise operator) posted strong gains.

The vaccine gave investors a glimpse of what a “normal” world might look like again in 2021. The resultant rotation out of gold and some tech companies into emerging markets and traditional industries was positive overall for most South African investors. 

However, the markets remain fraught with complicated dependencies and numerous potential outcomes over the next 12 months. A change in U.S. administration, coupled with an uncertain Coronavirus recovery, means that investors will need to tread carefully in the short-term.

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Against this backdrop of arguably one of the most chaotic and unpredictable years in modern history, we are pleased to report that since 01 Jan 2020 our Unicorn Fund returned over 60% in ZAR and our Altos Fund returned 14% in USD

We have seen this as an opportunity to increase our exposure to USD Assets and take advantage of the weaker USD and tech prices. While the ZAR could strengthen more in the short-term, our view over the longer-term is unchanged: we expect the ZAR to weaken and for global tech companies to provide the best growth opportunities.

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