Although all the votes are not counted, Joe Biden has already reached more than 270 votes of voters, which are needed to elect the American president. The markets were expecting a victory for the Democratic candidate. What happened before Biden’s victory? And what else to bet on?
Shares of technology and health companies rose as Biden’s inevitable victory and the Republican majority in the Senate dispelled political uncertainty over corporate taxes and health care reforms, including changes in the price of medicines. At the same time, we witnessed the fall in the spot volatility index VIX and the overall shift of the futures curve to the VIX index downwards. This suggests that investors are getting rid of hedging against end risk. The general narrative returns to tugging at stocks because there is no other alternative. The fact that the expected “blue wave” did not occur has so far taken the wind out of the sails of reflation trading and sent bond yields a little lower again. Overall, this combination of responses is optimal for stock markets and especially for growth stocks.
Wild actions
Stock prices have risen rapidly around the world, with US technology companies taking the lead. Futures and the Nasdaq 100 gained momentum the day after the US polls closed.
Now it is basically certain that Biden will win the US election. In the Senate, Democrats are unlikely to win a majority, so the current situation will be largely maintained and pre-election “fears” of the “blue wave” that could lead to higher corporate tax rates (especially GILTI intangible income rates) will not materialize. assets) and health care reform.
This scenario has supported the shares of healthcare and technology companies, much more than others. For energy, the election result is neutral, whether for oil and gas or green energy. It seems that emerging markets are already beginning to anticipate some change in foreign policy that will occur after Biden’s victory, which could also bring higher appreciation of Chinese stocks.
Steep fall in the volatility index
Another significant event following the US election was the sharp decline in the VIX index, which fell from 37 to 26 in just four days. The entire front of the futures curve on the VIX index moved lower. Probably because the market got rid of end-use hedging and the biggest election uncertainty disappeared. Given the huge volume of unilateral trading by retail investors in weekly and monthly options on individual stocks, we do not think that the days when the VIX spot was anchored at a very low level and the contango rose sharply would return. In the future, a little different volatility awaits us.
Growth stocks in the limelight
When the Senate is in the hands of Republicans, we will most likely not see a large fiscal impulse, so reflation trading has lost some strength. As a result, government bond yields will remain low for some time to come. Thus, trading in the “TINA” regime, ie “There’s No Alternative”, comes into play again, and the prices of long-term assets (growth shares, real estate, etc.) will continue to rise.
It is still true that the Nasdaq 100 index represents the fastest growing companies generating solid free cash flow. According to our calculations, the free cash flow yields in the Nasdaq 100 index are still about 2% above the worst yield to maturity of global corporate bonds. This means a significant rise in the price of growth stocks, but nothing to worry about. In addition, the growth stock segment yields many times higher returns in the event of inflation. Therefore, we remain convinced that investors should strengthen their positions in growth stocks.
Disclaimer: This article is for information purposes only and does not serve as an investment recommendation under Act No. 256/2004 Coll. on doing business on the capital market. In preparing this article, the author relied on publicly available sources. Roklen Holding as and Roklen360 as are not responsible for any errors in the text or data.
–
