By Duncan Goodwin, manager of the Premier Miton Global Sustainable Growth fund
With the US election underway, it’s hard not to feel fatigued by the all-consuming campaign. It has dominated headlines on both sides of the Atlantic and generated endless investor commentary over its potential impact on markets.
But investors should see through this for what it ultimately is – noise.
Investors that expect a specific outcome in the US elections may fall into a trap. In truth, long-term investors focused on the underlying fundamentals shouldn’t change course because of a macro event like the US election unless it creates specific opportunities in the market.
Block out the election noise
Elections are a source of uncertainty, and by and large, investors do not like uncertainty. But should that mean you radically rebalance your portfolio, especially if you’re a high-conviction thematic investor, just because one party wins the US presidency? No.
But what about the risk of a Trump presidency to the subsidy regime established by Biden’s Inflation Reduction Act, and the otherwise supportive position of the Biden/Harris administration towards renewable energy infrastructure and generation? For example, surely that, with Trump’s three-word ‘drill baby drill’ energy policy, cannot be positive for the outlook for US green energy companies and, therefore, warrants a rebalancing?
In reality, markets tend to worry in a tunnel-vision way that a Trump victory would be bad for the Inflation Reduction Act and renewable energy, and good for fossil fuels and other highly regulated industries like banks.
This is too simplistic because it ignores, for example, the significant green energy investment, especially in solar power, concentrated in Republican-leaning US states in recent years – making it highly unlikely that a Trump presidency would completely repudiate this massive and rapid growth industry in Trump-country states.
Besides, ahead of the election we are already seeing a slowdown in markets where there is genuine policy risk caused by the election, such as with the US electric vehicle market. This is much more pronounced than any impacts on the solar energy market. Ultimately, the market is already factoring this in.
The flight to safety
Perhaps the prominence of this election in investors’ minds could be the fact it follows a number of major macro, top-down news events over the last five years that have had a seismic impact on markets: from the covid pandemic to the energy crisis to the end of the ultra-low interest rate environment.
But a focus on this macro has also resulted in a focus on safety, and by extension, concentration in the market. Just look at the Magnificent 7 stocks. There has been tremendous momentum in the large cap tech sector, and part of this is driven by a focus on big macro events – like the US election – to the detriment of a more measured, conviction approach.
See also: The 15% of US funds that beat the S&P 500 over the past decade
In times of uncertainty, too often the orthodoxy takes shelter in the familiar, and with it the leading tech stocks have ballooned in size. There has always been macro uncertainty, but perhaps once the hubris of November 5 dies down, investors’ emphasis could return back to fundamentals.
Focus on the thematic
As interest rate changes slow, with no return to zero rates, a stabilisation of the monetary environment could put more emphasis on sustainable growth themes. In this calmer environment, thematic earnings momentum could continue to rise to the fore.
Long-term investor should be less interested in which stock is going to rally on November 6 and more interested in where there could be opportunities in the long term, driving sustainable returns. While we would of course look to take advantage of any volatility in the market, a sustainable approach will be much more meaningful for investors, especially in nascent growth themes like sustainable healthcare which will pan out over the next decade.
See also: Is there any point investing in the US actively?
It’s widely acknowledged that healthcare is relatively insulated from economic cycles – good health doesn’t match the interest rate cycle after all. But it’s the thematic tailwinds in this sector, such as the accelerated push for new drug discoveries like those potentially treating Parkinson’s, or the deeper push into real-time healthcare such as with GLP-1s, that will really drive long-term sustainable returns.
And so, the next time an investor checks the latest opinion poll in a battleground US state, remember that ultimately, political noise tends to be just that – noise. Investors shouldn’t be shifting our portfolios based on the outcome of the US election. Instead, they should be more interested in how major global trends will reshape companies and industries over the next decade.
These structural themes will be far more significant for long-term investors than who sits in the Oval Office. By staying focused on the fundamentals, investors can take advantage of volatility in the market, seizing opportunities as they arise, without getting blown off course by the political weather.
