3 top investing executives lay out the biggest risks to markets heading into a volatile election season — and share their best recommendations for navigating what happens next
- Three top investing executives from Wells Fargo, Natixis, and BNP Paribas recently laid out various market risks going into the election season.
- They shared their best investment ideas including sectors, geographies, and styles as the market takes it turns amid elevated volatility.
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Depending on who you ask, the stock market is either drifting higher or heading towards a precipitous freefall over the next few months.
While markets are hard to predict, investors are almost certainly facing elevated volatility between now and the November US presidential elections, according to three top investing executives.
"If you remember a year ago, the VIX was below 10," said Kirk Hartman, global chief investment officer for Wells Fargo Asset Management, which manages $578 billion in assets. "So, I would argue that it's actually a little bit of rough waters here with the VIX being at 25 and having spikes."
Hartman was referring to the CBOE SPX Volatility Index (VIX), the so-called Wall Street fear gauge which measures the expected future volatility within the US equity market.
And the biggest source of the heightened volatility? US presidential elections.
"We think the two biggest impacts we can have for US equities from the election come from potential policy around tax," said Greg Boutle, head of US equity and derivative strategy at BNP Paribas in a Wednesday media call.
A Biden administration could look to enact a partial rollback of the Tax Cuts and Jobs Act of 2017 and potentially hike the capital gains tax, according to Boutle.
"I think both of those things could have a disproportionately negative impact on US equities relative to the economy," he said, adding they "could have a disproportionately negative impact on some of those growth stocks that have so far done the bulk of the heavy lifting in the rally."
In addition to the uncertainty surrounding the US election outcomes, Esty Dwek, head of global market strategy at $1 trillion Natixis Investment Managers, is factoring in risks including simmering US-China trade tensions, Congress' failure to pass additional stimulus packages, and a second wave of COVID-19 cases that shut down the economy again.
Navigating choppy waters
Faced with such market risks, the three investing executives have each offered their own recommendations for investors to navigate through choppy waters.
Wells Fargo's Hartman is watching the industrials sector to gauge if the economic recovery is taking place. The iShares US Industrials exchange-traded fund tracks an index of companies in the sector.
"Everybody thinks growth is only mega tech, but there are actually a lot of good, solid industrial companies in the area of robotics and others," he said. "I think the tech stocks have had a heck of a run, so I would be looking more at the industrials and the value sectors."
He is also positive on the energy and materials sectors making a comeback. Investors can execute on his view via the iShares US Energy ETF and Materials Select Sector SPDR Fund.
"Oil is under pressure right now, but if you look at the last decade, we had oil prices as high as $100 a barrel, and then earlier this year we had oil futures below zero," he said. "If you do get a recovery, you're going to get energy and materials coming back."
Another place to find value is outside of the US — particularly in Europe and emerging markets. Two ETFs tracking the geographies are the Franklin FTSE Europe ETF and Franklin LibertyQ Emerging Markets ETF.
"Because of the weakening dollar — and more and more because fixed-income rates are so low — you have to look at currency," he said. "I think that Europe and emerging markets are areas where you can find value."
Natixis' Dwek believes that markets will continue moving upward despite the expected near-term volatility.
As such, she is bullish on the technology and healthcare sectors for the long-term. Dwek also believes that environmental, social, and governance investing will be a long-term winner.
Investors can track the returns of the tech and healthcare sectors via the iShares US Technology ETF and the iShares US Healthcare Providers ETF.
"ESG investing offers an attractive risk-return ratio because you're getting enough returns over time without sacrificing performance anymore," she said.
"What we saw during this crisis is that it actually proved more defensive in the shorter term as well. Some of it is structural ESG strategies were pretty much positioned perfectly for this type of crisis with overweight in technology and healthcare and underweight in energy, materials, and travel."
Investors can get into ESG investing via the Xtrackers MSCI USA ESG Leaders Equity ETF.
However, Dwek believes that value will struggle to come back due to the low-rate environment.
"I think central banks, in particular, the Fed are very happy with low rates, and that's just a challenge for value to overcome," she said. "It doesn't mean that you can't have some catch-up, so European stocks and more cyclical stocks that are typically more value-oriented should be able to catch up a little bit in the short term."
For BNP Paribas' Boutle, the debate about the potential performance of value and growth stocks is distinctively important.
"We think the growth stocks have benefitted much more from the monetary policy regime and value stocks are a little bit more tied to the fate of the real economy," he said. "If we did have a political outcome that led us to believe we would have more expansive fiscal policy in 2021 and 2022, we do think that could start to catalyze more of a rotation into some of these value names that have underperformed."
While Boutle holds a neutral view on US equities overall, he is tilting more towards value-oriented stocks, industries, and sectors.
The Vanguard Value Index Fund ETF Shares tracks a basket of value-oriented companies.
"We think that there are potentially more headwinds for growth moving forward," he said. "And there are certainly some green shoots that may be starting to emerge that we think could help the more value-orientated stocks, industries, and sectors that have lagged so badly and started to outperform."
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