US secular growth firms still enjoy room to grow

December 09, 2020 08:41
Photo: Reuters

With the Trump administration now appearing to cooperate with the transition process, a bitter election battle finally appears to be drawing to a close with attention now turning to the challenges that President-Elect Joe Biden will face when he takes office.

It is important to remember as we turn to this next chapter that Biden has a relatively short window to make initial headway on his policy agenda. The President-Elect may not have achieved the ‘blue wave’ sweep to easily push through his agenda and avoid divided government – with the Senate likely to fall to the Republicans, though the two seat Senate race in Georgia to be decided in January 2021 could tip the casting vote to the Democrats in the event of a 50/50 Senate split – but the all-important midterm elections for Congress in 2022 loom, which could, as historical precedent suggests, tie his hands further.

The incoming Biden administration will thus need to be very selective on what it is prepared to prioritize. At the moment, these are thought to be health and safety – in particular organizing a COVID taskforce – and economic stimulus. Other issues he fought his campaign on, namely civil rights, municipal funding and climate change legislation, meanwhile, will likely need to wait.

In our view, one benefit of the US election result for markets is that the continuation of divided government will be less onerous for policy change than could have otherwise been the case. However, also importantly for markets, it seems likely that divided government will lead to a scale back of large fiscal stimulus plans.

Relief stimulus for COVID-19 will be less controversial and will probably have bipartisan support. Recovery stimulus for the economy, however, may require much more political capital, particularly if it is to be achieved on a budget neutral basis. With a Democrat entering the White House, the Republicans are expected to resume their role as fiscal hawks to constrain borrowing and spending.

Another source of uncertainty for the market has been the outlook for the coronavirus pandemic. The recent wave of vaccine announcements has led to greater optimism about returning to more normal levels of activity. It is true that a widely adopted vaccination program would facilitate that, but it is perhaps a bit too early for strong views about widespread vaccine supply and availability and the rate of uptake globally. It seems that we may be in an environment of non-synchronous global growth for some time.

What will all this mean for markets? At present, we are still in a low interest rate, low growth and low inflation environment, which tends to be supportive for secular growth companies in the US. Having said that, there may be pockets of rotation in the market if we see spiking US GDP growth accompanied by adjusted inflation expectations.

Investors should have modest expectations for the market overall. We should accept that the appreciation we have seen in the overall market and in certain companies may result in less overall upside potential on reasonable valuation assessments. We think that there is opportunity and scope for select companies to grow within their respective industries, with the main secular growth themes in sectors such as cloud computing infrastructure, enterprise software, payments processors and e-commerce still very much intact. The world returning to something resembling normality may also present opportunities for growth companies that had been penalised for not having an online presence and are more dependent on footfall traffic.

As for FAANG stocks (Facebook, Amazon, Apple, Netflix and Alphabet) and tech-growth companies have enjoyed years of strong growth even during the pandemic, their secular drivers fall into the above-mentioned categories and are relatively administration agnostic. We remain very alert to potential changes in the competitive landscape and legal framework that these companies operate within.

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US Portfolio Specialist at T. Rowe Price