US Markets: A dynamic start of the decade


By David Bui & Jonathan Graas,
Fund Managers at DPAM

The past year has unquestionably been a fantastic year for US markets with stellar performances on (nearly) all fronts. As we enter 2020, the markets will likely maintain their momentum for the time being, but there could be trouble on the horizon:

The US elections will probably be one of the biggest sources of volatility later on in the year. Its eventual outcome will end up being a major contributor (or detractor) to the overall market performance. If they want to win this election, Democrats will have to pick a strong candidate to put up against Trump. If they fail to find a suitable nominee to galvanise their voter base, Trump would, once again, gain a substantial advantage. There are currently several hopefuls vying for the Democratic nomination. Joe Biden is the current front-runner. He seeks to make the most of his relatively middle-of-the-road political persona and his prior experience as the vice-president to Obama. Nevertheless, one cannot help but wonder whether moderate viewpoints will be enough to beat an opponent who thrives on division and polarisation. Perhaps disruptive candidates, such as Elizabeth Warren or Bernie Sanders, stand a better chance of levelling the playing field. The success of their fundraising campaigns -which rely solely on grassroots donations- clearly shows their supporters’ willingness to go the extra mile. Still, their strong views on divisive topics like health care and college tuition could prove too radical for some. For the time being, it is hard to make any clear predictions on the most likely winner of this Democratic race, but it is definitely something to follow closely in the coming months.

The health care sector is probably one of the main industries which will be directly impacted by the current election. Medicare-for-all has become a hot-button topic in Democratic debates. Moderate Democrats, such as Joe Biden and Peter Buttigieg, advocate cost improvements and simplifications to the current system, while maintaining a partnership with the private insurers. Others want to completely start over and implement a Medicare-for-all system. This topic does not only strongly divide the Democratic Party, but it also has major consequences for the future of US insurers and health care providers like Anthem or UnitedHealth Group. As such, we expect a lot of noise in health care stocks as we approach the designation of the Democratic Nominee in early summer and the presidential elections in November. However, it seems that one of the more leftish candidates –senator Warren— has already toned down her speech. If elected, she would only pursue her full-scale health care reform in her third Presidential year.

Although 2019 was an amazing year for most sectors, we did notice some slowdown in industrials. Both the semiconductor industry and the automotive sector in particular seem to have faced some headwinds. We are quite confident that the former will rebound in 2020 on the back of strong fundamentals. However, we remain bearish on the latter, as we fail to see any major signs of recovery (quite the opposite, in fact). It is a cyclical industry, meaning that if this year’s overall growth begins to stall, it could spell disaster for the struggling sector. In addition, most major car manufacturers are currently facing a costly and R&D-intensive transition towards electric vehicles (EVs). Even though the shift away from carbon-based fuels has become nearly inevitable, EVs are definitely far from growing into a considerable source of revenue for car manufacturers. China tried to lead the way with its promotion of EVs. Unfortunately, after the government cut some of its initial subsidies in July, interest quickly waned. Though promising in the long run, the EVs’ current infrastructure and price will require substantial improvements if manufacturers want to successfully market these vehicles as anything but heavily-subsidised ecological novelties. Still, as investors are overwhelmingly bearish on this sector, it could lead to some unexpected opportunities, too. The overly-negative outlook could ignore the low market-penetration (and subsequent growth-opportunities) in countries such as India. As such, we remain very prudent, but would advise to keep an eye out for potentially undervalued stocks.

The initial news on the US-China trade war seems to be positive. Both parties signed a “Phase 1 deal” on January 15. However, investors are keenly aware that this is more of a formality, if anything. The mini-deal is a good first step, but does not immediately address the core issues at the heart of the trade war. Instead, it lays the groundwork for future trade deals. Trump’s attitude towards these upcoming deals will be quite interesting to follow as well. On the one hand, he will have to be relatively accommodating: He will probably want to capitalise on the results of future negotiations as a way to gain support for his presidential campaign. As such, he will need to come up with some tangible results to back up his grandiose tweets. On the other hand, Trump does not want to give in too easily and risk losing face in front of China or the American electorate. The author of “The Art of the Deal” will have to carefully mix his hard-ball attitude with a sentiment of cooperation.

Unfortunately, this sentiment of cooperation is clearly absent in Trump’s attitude towards the EU. The US president was quick to retaliate as France pushed through the GAFA tax, which nearly exclusively targets American tech giants. The US responded with threats of stringent tariffs on French luxury goods, such as champagne, cheese and handbags. The EU jumped to its member state’s defence, condemning the American reprisals and agreeing to respond in kind if the US were to enact their tariffs. Fortunately, it seems that any further escalations may have been avoided as both the French and American heads met each other in Davos. They agreed on a truce regarding the digital tax dispute and will extend trade negotiations.

As we have mentioned earlier, we still expect the US markets to perform adequately this year. However, investors will probably have to become a little more selective as we have entered the new year with unresolved trade war uncertainties, geopolitical tensions and an upcoming presidential election. Consequently, company fundamentals will come to play a larger role this year to shield investors from a comparative slowdown, or a sudden increase in volatility. We encourage diversification across industries to minimise systematic risk.

Investors should also consider a company’s attitude towards ESG. The on-going move to a more sustainable future will undoubtedly put a lot of strain on companies which fail to adapt accordingly. As such, we strongly argue in favour of open-minded companies which are ready to embrace the opportunities brought on by this transition. Although ESG has been a common term in European markets for a while now, Americans took a little longer to adopt the acronym. However, we have recently noticed that American companies increasingly invest in sustainability.

Another factor worth taking into account to deal with the upcoming uncertainties is a firm’s dividend growing policy. We consider it to be a clear sign of a company’s overall health, value and quality. Obviously, it is important to note that a dividend policy can differ from company to company and sector to sector. For example, more mature industries such as the beverage or household-product sectors, would be more inclined to redistribute earnings to their shareholders (rather than invest in projects which are unlikely to yield their cost of capital). However, it might be more beneficial for growing industries, such as biotech and IT, to allocate some of their cash flow to R&D. Regardless of company or sector, it is always important to consider whether a firm’s cash flow is invested correctly, be it as an investment in the company’s growth, or as a dividend pay-out.


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