J.P. Morgan Private Head of Cross-Asset Thematic Strategy Anastasia Amoroso joins The Final Round panel to break down what steps investors should take to benefit from what’s to come after the 2020 election.
MYLES UDLAND: Just one week away from Election Day. How are investors to think about this event, and how are we supposed to think about markets as we head to the end of this year? Joining us for more on that topic is Anastasia Amoroso. She is the head of Cross-Asset Thematic Strategy at JP Morgan Private Bank.
Anastasia, great to have you back on the show. So let’s start with the election, how you’re thinking about it, what you’re telling folks about it now that the day is almost finally here. And then I guess we can sort of move on and start to think about other ways to position the portfolio heading into 2021.
ANASTASIA AMOROSO: That’s right, Myles. Good to see you. We are a week away from the election. And it seems like investors are having a bit of a wake up call as you see the markets kind of consolidate and maybe even pull back here a little bit. The reason why I say it’s a wake up call is because most investors we’ve been talking to out there in the markets have been saying that they’re now discounting the volatility around the election because maybe the outcome seems a little bit more certain.
But I don’t think that’s the right conclusion to make here. I think it’s a little bit premature. And I say this for a few reasons. You know, first of all, if you look at the polling numbers, especially in the key swing states, it is a close to call election. It is not– it’s virtually tied, especially when you look at those swing state ones again.
And the other reason I say that we can expect potentially some volatility– we can’t discount it– is because take a look at how many people have voted early and how many of those people were absentee voters, meaning submitting mail-in votes. It is really a historic percentage. I mean, we’re talking close to 50% of the people that turned out for the 2016 election in aggregate.
So I don’t know exactly how that counting is going to go. But what I can say is that this is the most predictable potentially volatile event that is just a week away, in the days and weeks that follow. So this is not to say that investors should flee the market is going into this election. But this is to say that investors should prepare.
And so there’s a few things that investors can do to do that. The first thing, I would recommend investors stick with their strategic allocation. Because over the course of the coming weeks and months, volatility will subside, and then we’re going to revert back to the long-term fundamentals, which I would argue are improving and somewhat positive in this point of the cycle.
But the second thing investors should do is consider maybe taking a little bit of gains in some of the tech shares that have done really well for them and maybe adding a little bit of hedging. Because as I said, this is the most predictable potentially volatile risk that’s out there.
MYLES UDLAND: And then, just quickly, to follow on the election, I mean, we saw what happened in 2016. Do you think that’s kind of put investors in this headspace of there will be a huge event around this, just because of the magnitude of the changes that we saw really during the overnight hours back in 2016?
ANASTASIA AMOROSO: Yeah, exactly. I think if you look at the betting odds, they are suggesting a win a certain way that candidate Biden is leading, as far as those betting odds are concerned. But it’s interesting because when we look at market positioning, the markets are positioned for volatility subsiding after the election. But the markets are not actually positioning for a landslide Democratic sweep.
And I say that because we have different ways of looking at the market. We look at the Democratic outperformers basket. We look at the Republican outperformers basket. And we’re not actually seeing that investors have been piling into the Democratic outperformers. And on the flip side, they have been adding to the Trump outperformers, such as financials and so forth.
So I think either way, we could see some meaningful moves in changes in positioning after this election. So yes, I think 2016 is fresh in people’s minds. And 2020 definitely has implications for investors as well.
EMILY MCCORMICK: Anastasia, this is Emily. I’m wondering just outside of equities, do you see any way for investors to perhaps look to other asset classes? I mean, just in taking a look at, I mean, even, like, the bond market, really seeing the Treasury yield curve steepening here in the past couple of weeks, do you see ways for them to actually play that heading into and around election season?
ANASTASIA AMOROSO: Yes, there’s definitely ways that we have looked at. I will say that the most pronounced way to position for the election outcomes is going to be in the equity markets. I think that’s where the risk reward is the best for this particular event risk. But the trade that you mentioned, the curve steepening trade is definitely top of mind for us as well.
I would say maybe that’s a little bit further out because we will really need to see for that yield curve to steepen out, we really need to get that COVID now third wave, unfortunately, behind us. We need the economic data to improve, we need a vaccine, and we need stimulus.
And so to the extent that some of those things materialize, and I would argue they’re not going to materialize the day of the election or even several days after, but to the extent that they materialize in the months after the election, I absolutely think there are ways to position for what’s to come after the election in the fixed income markets.
MYLES UDLAND: And then–
ANASTASIA AMOROSO: Besides–
MYLES UDLAND: Oh, go ahead. No.
ANASTASIA AMOROSO: Yeah, just a quick point. Besides the steeper yield curves, we are finding some value in the high yield markets as well. Yields have compressed, but there are still some idiosyncratic opportunities in the high yield markets as well.
MYLES UDLAND: And then thinking beyond the election and kind of taking a broader view of what we’ve seen so far this year and how it maybe informs our thinking into 2020, you note that there’s a ton of themes out there, AI, electric vehicles, fintech that have just had huge performance from a thematic standpoint this year. Some of those might be under the radar. I think some of those, a lot of people have had their eye on.
But as you look at those market trends and thinking about, again, 2021, and really, the rest of this decade, is that kind of an area that investors, even though there’s been strong performance, they’re still maybe not quite thinking about enough because, obviously, pandemic, recession, election has taken up a lot of our emotional and kind of mental energy here.
ANASTASIA AMOROSO: Yeah, thematic investing is a big area of focus for us. As it turns out, this concept of megatrends investing, I would say if it was under the radar last year, it was definitely discovered this year. And that’s why we’re seeing some of our artificial intelligence baskets up 73%. That’s why we’re seeing electricity– excuse me, clean energy up 73% as well, and electric vehicles not too far behind.
So I think investors are appropriately looking for areas of high growth. Because as we look out, as you mentioned, to the next three, five, and even 10 years, we do expect returns for the S&P 500 and large cap stocks to be somewhat subdued, to the tune of 4% or 5% on average.
And if that’s the case, many investors, whether they’re retail or institutions, have much higher return objectives. They have to go somewhere for those returns. And that’s why we turn to the concept of thematic investing in megatrends because companies that are tied to them are experiencing hyper growth. They are oftentimes growing their revenues and earnings 3-%, 40%, 50%. And no wonder that some of those stock prices are rising as a result.
This is not just a 2020 story. And this is a 2021 and, as you mentioned, the next three to five years story. We want to be looking for companies that are delivering above benchmark earnings growth. And there’s a lot of them that are tied to megatrends.