Stock Market Rebound. All Eyes on US Elections

 

The stock market emerged stronger after the Sept correction and with the US election weeks away, it is expected that the US stock market will be quiet until the market gets more certainty who the president will be after the election. Joe Biden is leading the poll numbers as of now, but Donald Trump may yet pull off another surprise again, like what has happened in 2016. The good news for the market is that both presidential nominees are expected to push through new economic stimulus to re-energize an economy that has been badly affected by the COVID-19 pandemic. 

If Trump wins the presidency, he is expected to continue his policies of cutting taxes across the board and investors will be encouraged by this win and the market will be expected to rally in the medium term. For Joe Biden, certain benefits such as healthcare and green tech will expected to benefit as he will probably expand Obama's legacy which has been partially dismantled by the Trump presidency. Asian markets may benefit as he may restart the scrapped Asia Pacific free trade talks which will benefit countries in the Asia Pacific region and may give a boost to the East Asia market. However, Biden is expected to maintain a tough stance on China but investors will definitely see a more stable economic trade environment without the unexpected trade wars by the Trump administration.

In any case, a Biden win will not be sufficient for him to push through tough policies as the Republican controlled senate will obstruct most of his policies like what happened during the 2nd term of the Obama administration. All eyes will be on the Senate race and if the Democrats will be able to secure the White House, the Senate and the House of Representative. If that can be achieved, we can expect a quick roll-out of the Obama era policies and a stronger focus on combating the COVID-19 pandemic and healthcare related issues.

The Impact of COVID-19 on Global Stock Markets.

As the economies around the world starts to recover from the COVID-19 pandemic, we can use the stock market as a snapshot on the recovery of each of the major regions around the world. Outperforming the rest of the sector is the US tech sector represented by NASDAQ and its performance has surpass the pre COVID-19 high. However, the general stock markets are still below the pre COVID-19 high, which is a better indication of world economies in recession. The best performing region is US, followed by China and East Asia which has managed the pandemic rather well in comparison. Europe is the worst performing among the 3 major regions.

Singapore's stock market is badly hit and it is currently one of the worse performing markets in the world as it drifted back down reaching the lows seen in March. The lack of big names tech stock in Singapore and it's property, energy and finance heavy index is being weighed down as these traditional sectors are hard hit by the pandemic. Given the current development, investing in USA and East Asia seems to be the safer bet as compared to Singapore equities.

Portfolio Strategy

We did a major portfolio adjustment in the month recently. The portfolio has been adjusted the following way after observations from the recent market correction

- Asset allocation changed from 80/20 to 70/30 equity/bonds

- Removed Energy fund, Healthcare fund and Emerging market

- Added Technology fund and East Asian fund

The decision to remove the energy fund due to its not able to fulfill its role as a value fund. The fund was picked because energy stocks have been the worst performing during covid-19 and it is expected lose the least in a market correction given it had already been battered so much. The correction saw energy stocks losing the most as compared to all other sectors. I dropped the fund as it has defied the role as a value pick when by definition, it should lose the least in a correction and I believe that the short term losses going forward as the market gyrates may not compensate the potential returns it will give, given that the COVID-19 situation will slow travel for another 1 year.  In exchange, technology fund is introduced as the sector is proven to have controlled it losses well and is seen to be a growth sector during the pandemic. 

Healthcare fund was introduced before the recession as a defensive play against any recession and it has fulfilled its role well, hence it is reallocated to other opportunities.

Emerging market fund has been removed in exchange for an East Asian fund comprises mostly of South Korea, China and Taiwanese stocks with the view that the pandemic is much better controlled in these part of emerging market economies as compared to India, Russia and Latin America which are heavily weighted in the old emerging market fund. East Asia is viewed to be positioned for better growth as the chances for an uncontrolled pandemic shutting down its economy is deemed to be lowest at this point of time. 

I believe that the stock market, supported by easy money and lack of alternatives due to a zero interest rate environment will continue to do well for the short term, but I will wan to lock in our profit for the year by lowering the equity proportion to 70% and increased the bond weightage to 30%. This is also to prepare for any eventuality that a bigger 2nd or 3rd wave of pandemic rears its ugly head and economies have to go through full shut down again. It is always good to save some ammunition in this volatile environment.