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Natalie Taylor, portfolio manager at CIBC Asset Management.
We really have been on a journey since election day. So, from the outset, the markets concluded that a blue wave, like the polls had predicted, was an unlikely outcome, and this actually helped the market. The risk of more left-leaning policy was taken off the table, such as increased regulation of technology or healthcare reform and higher taxes as well. So we saw tech and healthcare stocks perform particularly strong. On the flip side, the idea of aggressive fiscal stimulus that the Democrats have been pushing for was tempered and assets, we saw gold and bond yields come off.
However, as a Biden victory started to come into focus, we saw a catch-up of the cyclicals and a rebound in gold and rates, as optimism around stimulus returned. I say, despite the uncertainty in the days following the election, markets were relatively strong in the days that followed. We think this continues, primarily because the uncertainty around the election has dissipated. And more importantly, we think that there’s a strong economic recovery that looks firmly ingrained at this point. In terms of top picks right now, as I alluded to earlier, I believe there’s a meaningful economic recovery that’s taking place, driven by strong consumer balance sheets and spending, which has obviously been aided by government transfers and a return of employment over the last few months.
We have record-low inventories that need to be replenished and improving employment, as I indicated. I think my outlook has less to do with the outcome of the election. However, there are a few areas where I think a Biden presidency accelerates my current thesis. One such area would be in renewable energy. And in the last year, the momentum behind clean energy has accelerated meaningfully around the world, with U.S. being really the exception and actually the country withdrew from the Paris Agreement on the day of the election. We think Biden’s commitment to renewable energy could unleash meaningful growth in the U.S., although his efforts might be somewhat hampered by a divided government.
While all renewable power companies are likely to benefit, we like Northland Power best. It operates primarily in off-shore wind development, which is a higher return and less competitive segment of the renewable market. This is an area that the U.S. is yet to explore meaningfully. Northland’s valuation is among the most reasonable in the sector, as it has legacy thermal assets in its portfolio. We believe that as these assets roll off, Northland will re-rate to levels that are more consistent with pure-play renewable companies.
Another area that stands to benefit from a Biden presidency, is infrastructure. We believe that an infrastructure package is likely, as it’ll build on the current environment, and help sustain the recovery that’s started.
We also think that it has largely bipartisan support. In terms of companies that could benefit, we believe that WSP is well- positioned generally, but could additionally benefit from increased infrastructure spends. WSP is a well-run global engineering firm that is currently trading at an undemanding valuation, despite revenue holding in fairly well through the pandemic. We see the opportunity for them to sustainably expand margins by partially retaining some of the work-from-home initiatives that are currently in place. In addition, they’ve been successful acquirers in the past and we expect consolidation in this sector to pick up, as the economy continues to open up.
The market reactions are very optimistic. We’re seeing sectors that have been beaten up over the last few months, such as aerospace and financial service companies, really rebounding quite strongly. That idea of a normalization in the economy creeps into investor thinking.
On the flip side, the stocks that had benefited from work -from-home and quarantine during the pandemic, such as a number of technology stocks, e-commerce stocks, housing, and home improvement stocks, are giving up a little bit of ground today as well. But I would say broadly, the market is much stronger than not. We’re also seeing gold down quite meaningfully, as a result of less need for stimulus intervention by the Fed[eral] Reserve going forward. On the day of recording this podcast, we’ve also received news of the efficacy of Pfizer’s vaccine, which is also quite a positive for economic growth in the markets, going forward.