A light at the end of the tunnel

Daltium Opinions

Covid-19 will continue to dominate the news as a major campaign to vaccinate the global population gets underway. The longer-term efficacy of all these draconian measures, including the profoundly divisive 'Lockdowns,' remains to be comprehensively evaluated and judged.

Despite the vaccine being developed in record time, it appears as of this article to be safe and effective against the virus. Whether this will apply to mutant strains is as yet unknown. Over time, the global population will hopefully gain herd immunity as hospitalizations decline and the pressure on ICU wards lessen. This, both psychologically and materially will assist the World's economies in reopening completely and life to slowly return to something like normal.

However, much of this normality has already been factored in by major stock indexes, particularly the Nasdaq, which was up almost 50% in 2020. The potential now for negative surprises seems more significant than the potential for positive surprises. No matter what happens, healthcare and biotech stocks will continue to be in the limelight. Big pharmaceutical companies such as AbbVie, Bristol-Myers Squibb, Merck & Co, Pfizer, Johnson & Johnson, Novartis, Abbot Laboratories, Eli Lilly, Medtronic, UnitedHealth Group, and Novo Nordisk will undoubtedly be in high demand as the planet turns to the healthcare industry looking for answers and solutions to the pandemic and its indirect effects. We expect governments to increase their spending on healthcare in the near future and demand from consumers will also play to the upside. This favors a portfolio tilt towards the sector.

The tempestuous and tumultuous US Presidential election that culminated with Joe Biden’s victory over Donald Trump in early November 2020 brings some investment themes into the spotlight.

We believe the Biden Administration to be more favorable to the healthcare industry than Trump and is likely to increase US government spending in healthcare. Biden will also move towards a cleaner and greener future. He stated that he aims to decrease US dependence on coal and other fossil fuels and said he would re-enter the Paris agreement, ditched by Trump on day one of his Presidency and, by Executive order, repeal the controversial Keystone XL pipeline.

This will likely favor renewable energy production and hurt fossil fuel production. The trend for renewables started some years ago but was severely dented by the pandemic coupled with the policy uncertainty surrounding the US election. With the election now over, investment in green energy should grow in 2021. Leading companies like NextEra Energy, First Solar, Renewables Infrastructure Group, Brookfield Renewable Partners, and Duke Energy should benefit. The move towards cleaner technologies appears here to stay and will help the sector outpace the broad market in terms of growth.

It would seem likely the Biden-Harris presidency will eventually turn less favorable to broad technology and raise taxes on the industry. Still, given the high-profile support Big Tech gave to the Democratic party, including censoring some Republican allegations, any legislation remains a moot point at this early stage in transition. Longer term it seems inevitable that the high-flying tech sector is poised to face more regulation, which may undermine its current growth projections. Most of these stocks are already trading on very high valuations, and when combined with a less flexible legal framework, it makes a good candidate for reduced exposure.

We expect the first half of 2021 to be volatile with investment focus and concern on escalating Government indebtedness as a consequence of the measures unleashed to deal with Covid but now the possible tax increases to pay for it. While stock markets are already forecasting recovery, the 'real economy' remains in a dark shade. Nonetheless, our lives should eventually return to normal as we overcome this unprecedented period of recent history. In the meantime, many new and exciting opportunities arise. While the broad market seems overvalued, themes like healthcare, renewable energy, and cleaner technologies are expected to enjoy a high growth potential. At the same time, the new President is expected to bring some favorable conditions to the development of the 'New Industries' and even the legalization of recreational cannabis.