Biden presidency to benefit traditional value stocks as the US heads towards full economic recovery

As the world’s largest economy, the US’ political and economic developments have significant implications on global capital markets. With the US Democrats securing unified control over the White House and the Congress, President Joe Biden’s inauguration has officially signified the beginning of the country’s “blue wave” era. The change of administration could prompt major shifts in global capital flows.

Under Biden’s administration, we expect the US economy to regain its upward momentum in a broader way. Biden’s US$1.9 trillion stimulus package is expected to provide a wide range of benefits such as unemployment aid, stimulus cheques and housing allowances. In addition, the new administration may continue to allow certain state and local governments to launch additional supportive measures. After a hard hit by the pandemic, the abovementioned factors are expected to give the US economy a boost.

Fiscal and monetary policy to support the economy

During the US presidential election, Biden pledged to increase investment in various parts of the economy, including renewable energy, infrastructure, transportation, housing, and environment. If his administration can keep up these promises and implement substantial fiscal measures, we expect that more jobs will be created in the market and in turn provide support to the relevant industries. On the other hand, the Fed is likely to continue with its accommodative monetary policy under the new administration. Together, these two driving forces can lead to solid growth in the US economy this year.

Opportunities set to broaden out to value stocks

The Wall Street staged an outstanding performance during Trump’s administration. As investors are well aware, major indices such as the Nasdaq has repeatedly set new record highs.

Although there has been a perception that tech stocks may face headwinds under Biden’s presidency, we think it is still too early to tell, as regulating big tech companies does not seem to be the administration’s pressing priority. On the contrary, the pandemic has changed the way how people live, work and socialise. This will bring structural changes to the technology sector over the long term.  Nonetheless, the valuation of some leading tech stocks is already quite high. As such, other mid- and small-cap stocks could be more attractive with them potentially playing catch-up.  Investors can also look out for sectors that are set to benefit from the structural change in consumer behaviour, such as 5G, data centres, semiconductor, and online security.

As the economy gradually returns to normal, traditional value sectors like industrial, material, and finance may also enjoy a brief period of greater upside compared to growth stocks, on the back of a re-opening of the economy.

Hedging pandemic risks with equity index options

As observed from the current data, the market has placed their hopes on the US economy regaining its growth momentum, and investors are switching back to a “risk on” mode. From a long term perspective, we do not believe US dollar will gain major strength as the global economy gradually re-opens. 

Under the above backdrops, Emerging Markets such as Asia and Latin America may be able to offer investors with more potential.  Comparing the asset classes, selective equities markets offer more opportunities than bonds as the former have some upside potentials that are supported by earnings revision and relatively attractive dividend yields.

As the market remains clouded by the pandemic, it is important for investors to remain cautious on the potential risks when allocating assets. One of these risks is the vaccination progress and effectiveness, as well as whether as a society, we can achieve herd immunity.  In light of this, equity index options may be a way to hedge against market risks.