Global Stocks Still An Overweight Despite Election Year Volatility, Covid Chaos

Global equities are still going to be an overweight heading into the fourth quarter, regardless of uncertainties and strains surrounding the way governments are now managing the pandemic, and an election nearly everyone now assumes to be hotly contested.

Thanks to central bank backstops, of course, and the fact that everyone also sees next year as roaring back to life, economically speaking, stocks are still the place to be, Barclays Capital is telling its clients.

The world economy has come back strongly, led by China in the emerging world, and the U.S. in the developed one.

“U.S. election-related uncertainty is a major risk, but with vaccine approval likely by year end, and a strong recovery, we still prefer global equities over fixed income,” says Ajay Rajadhyaksha, BarCap’s head of rates and securitized products.

Right. Who is buying bonds yielding half a percent? One of the reasons why the dollar is so strong is because Europeans and Japanese are buying U.S. fixed income and, of course, stocks. The dollar has become a carry-trade, something that was once the trade for investors buying securities in Mexico, Turkey and Brazil.

So far, the magnitude of the rebound has been positive and surprising. This goes for both China, where people are increasingly wandering around town without masks, and in the U.S., where the labor market is coming back as restriction send, and housing has surprised. A strong stock market has made the wealthy house hungry, not to mention a mini-exodus out of costly cities where hundreds discovered that despite the glamorous life and the cache’, big urban living didn’t cut it during a pandemic.

With the job market coming back, Barclays is now forecasting a 7.3% unemployment rate December.

U.S. economic data — despite the political press downplaying it — is “even more impressive,” says Rajadhyaksha, noting that the economy continues to recover despite stimulus winding down and Congress undecided on the final stimulus aid package.

Meanwhile, outside of the No. 1 economy, the No. 2 economy — China — is ahead of everyone. Their retail sales returned to pre-pandemic levels in August, and the jobless rate dropped well below the government’s end-of-year target.

As far as the election fight goes, and it is going to be a steel cage match for sure, expectations for volatility are higher than they have been relative to the last 15 years. But they are not extreme, says Columbia Threadneedle analysts in a recent note published on its website. They recommend investors stay focused on long-term goals rather than get caught up in the headline drama surrounding Trump versus Biden, and whether or not UK is going back into lockdown. Investors need to look beyond the political narratives driving these headlines.

Here’s a look at how they are seeing things on the election front.

British investment bank Schroders has come out in favor of Biden, at least in terms of their predictions. They give Biden a 60+ percent chance of winning the election in November.

BNP Paribas analysts are not picking sides, but said that if Biden does win, it “could benefit emerging markets”. China is poised to do much better at least from a sentiment standpoint as expectations are that Biden will not increase tariffs. Biden said he has no plans to cut existing tariffs, at this time. That could change. Who knows?

“The market has been a rocket ship, and it’s projecting what’s going to happen in six to eight months, when there’s a vaccine and people have started to go back to work, not what’s going to happen during the election,” says Todd Morgan, chairman at Bel Air Investment Advisors. “The Fed has done a spectacular job at saving this economy.”

Investors can still find cause for worry.

Besides a central bank eyeballs deep in the markets (and what happens when the pull back) equity valuations are historically elevated, especially for tech stocks. Even so, investors are not letting the down days turn them off.

With interest rates near zero, there are very few alternatives to investing in stocks.

People are picking companies they know well that pay dividends and using them in addition to savings accounts that are as good as cash in a pillow case.

Income related real estate has a great deal of uncertainty because of the lockdowns, and because of attitudes towards major cities that have been home to civil unrest.

Investment grade bonds pay next to nothing, especially after inflation and taxes. Fixed income investors have to go into speculative grade credit if they want yield.

“Common stocks are the most attractive,” says Morgan. “Millennials, who have been absent until now, have now started investing in the market. You also have people who have been sitting home bored investing in the market more than ever before. It reminds me of 1999 to 2000, when we had many housewives trading in the market,” he says, adding: “These housewives were outperforming many of the professionals when stocks were a hundred times earnings.”

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