Reuter Global Markets Forum Q&A: David McInnis
David McInnis MBA, CFP®, CIMA®, Co-founder and Principal of East Paces Group
Expect to see a market rotation in style, sector, and region after the uncertainty of the U.S. presidential election ends, David McInnis, principal and co-founder of East Paces Group, told the Reuters Global Markets Forum on Tuesday, October 27.
He added that he is holding on to cash and other short term instruments to take advantage of any dips around the election, and likes the “catch up” trade in Euro Zone equities. Following are edited excerpts from the conversation:
Q: Our first question - how are you adjusting portfolios for election related volatility as we head into the last week before Nov. 3?
A: We have taken a bit of a barbell approach in which we have equity exposures we believe will do well under both outcomes but then more specific exposures that align with each candidate’s policy initiatives.
Q: If you can, could you go into more detail on what you're expecting under either candidate?
A: We have seen our Biden stocks which consist of more Alt Energy/ Green Tech, Infrastructure and Health Care have significant outperformance over the Trump Basket which aligns with cyclical recovery stocks ie Hotels, Airlines, Energy and financials outperform.
Q: After yesterday's pullback, what are you expecting to see over the next week in markets leading up to the election?
A: Our historical analysis suggests that themes related to presidential candidates in an election year often mean revert after the event has taken place. If Biden wins we expect selling in momentum and domestic large growth as investors discount the prospects of higher capital gains tax. You may see an acceleration of this theme as we approach the election and sentiment is for Biden.
Q: How are you advising your clients to hedge for further risk and volatility, especially if the election results are significantly delayed?
A: We take a diversified approach in most of our portfolios so we are holding higher cash levels and short term instruments looking for any short term dislocations and asset pricing discounts to then buy stock we can own for a considerable period. We really like the non US growth stocks that typically trade on US exchanges.
Q: Are you looking at European growth stocks, then?
A: After the election barring a significant delay in the official results, we like the catch up or laggard trade for equities in the Eurozone.
Q: What do you expect as far as the U.S. economic recovery as we into the end of the year, especially absent more stimulus and the growing "second wave" of cases?
A: In particular if we have a Democratic sweep, we would expect a lower more volatile market going into year end. This would set up for a large stimulus bill and sizeable market rebound in early 2021.
Q: What are your thoughts on the traditional 60/40 portfolio as a long term strategy, given the current environment?
A: We have adjusted our fixed income exposure to reflect more international holdings and short duration TIPS. We feel as if inflation will make a comeback in late 2021. Until inflation and economic growth return the traditional bond side of the 60/40 should continue to add ballast and preservation elements in volatile markets.
Q: Understood, are you looking at gold at all, given your view on inflation?
A: Yes, we have constructive view of Gold but feel like we will get more protection out of the materials sector as a whole.
Q: Given your views on European equities, would you favour them over U.S. sectors like tech given how high those valuations are?
A: We believe we will see a durable rotation in style, sector, and region after the election. However, the degree of this rotation may be predicated on the winner. This includes European Equities and Global equities.
Q: What's your view on covered calls on the indices considering current implied volatility?
A: Covered calls is not an area we tend to venture but certainly selling volatility while premiums are elevated can be a good hedging strategy.