With the US Presidential Election now upon us, Joe Biden looks to be in an extremely strong position and is a hot favourite to win the race to the White House. Some observers will recall the 2016 election when Donald Trump secured a surprise victory over Hilary Clinton and there are some suspicions that he may be able to repeat the trick this year. However, the situation is somewhat different this time round. Biden seems to have a very strong position across the Electoral College system and voters appear to be much less undecided than they were in the lead up to the last election. These swing factors, therefore, do not seem to present such a generous opportunity for Trump as they did in 2016.
Should he win the election, Biden is likely to introduce higher levels of corporation tax as well as a bigger spending bill to help stimulate the US economy. This will have benefits and disadvantages for stock markets. We feel that mega cap technology businesses will be particularly vulnerable to higher taxation. They could also face stronger anti-trust action as Democrats are likely to be more concerned about the growing monopolies that many of these businesses are carving out for themselves online.
Turning to the UK, the Brexit negotiations are entering their closing stages. Boris Johnson and his EU counterparts are fighting tooth and nail to try and resolve their differences. Both parties seem to be to-ing and fro-ing and threatening to walk away from negotiations. This level of brinkmanship is always dangerous and there is a distinct risk that the EU and UK will end up with no deal. This will be bad news for Europe and potentially disastrous news for the UK economy. At this stage, it is impossible to predict with any certainty what the outcome will be and we are continuing to monitor the situation closely.
Perhaps what is more interesting is the way that the constituents and the value of the FTSE 100 is beginning to change. The evolution of the shape of the FTSE 100, historically dominated by financials and energy companies, has been overlooked by many. The index has been underperforming for some time and its current level of around 5,880 was first seen in 1998 – some 22 years ago – and it has consistently underperformed the world stage since then.
We have been witnessing a gradual rebalancing of the constituents of the index which now represent a more interesting mix of businesses as a result. It is possible that, by the end of this year, Unilever will be the largest company in the index, although this will be dependent on its Dutch shares being rolled into its UK listing. This creates a much more interesting proposition for investors, particularly since in its new shape the index is relatively insulated from Brexit-related headwinds. 75% of the revenues of the companies within the FTSE 100 come from abroad which will largely unaffected by the outcome of the UK’s Brexit negotiation.
We feel that the index is beginning to be more attractive and we have posted buy-in levels at around the 5,600 mark. In our view, this will be a good juncture to draw on some of the cash we have in our portfolios and to put it to work in what will be quite attractively priced assets.
Jason Broomer, Investment Director
