Fidelity: Market volatility from the US election presents a buying opportunity for contrarian investors
2min read Fidelity International's Dan Roberts writes that as the market digests the results of the US election, his team is closely watching the policy shifts of the new administration to assess how the new policies are likely to affect US and non-US businesses in the coming months. Dan Roberts says that as a long-term investor with low turnover, the US election is unlikely to trigger a significant change in his portfolio. However, the market volatility and short-lived knee-jerk reactions to hot topics such as the US election may present opportunities for contrarian investors to buy on the cheap.
However, Dan Roberts says his strategy remains unchanged and he sticks to a bottom-up approach to selecting high-quality, cash-generating, well-run companies with competitive advantages and a future driven mainly by internal factors. Dan Roberts says his investment case does not depend on the political or macro scenario playing out but focuses on companies he believes are worth investing in regardless of the government in power or the cycle.
After analysing long-term trends, Dan Roberts found no clear relationship between the composition of the US government and the subsequent returns of the US stock market. The gains of the US market were broadly similar over the four years after the election, regardless of whether a Republican or a Democrat was elected president, or whether one party won handily or the government was divided between the two parties.
After the election results, US cyclical stocks and companies perceived to benefit from regulatory easing (such as banks) jumped immediately, while defensive stocks and non-US stocks fell out of favour. However, the market will continue to digest the election results over the next few days, and will respond as actual policies are rolled out over the medium term.
From a policy perspective, both parties pledged to increase spending during the election, but the economic policies they proposed lacked detail. Stock investors will be closely watching the new administration's stance on taxes and tariffs.
The US stock market trades at a large premium to the rest of the world, with the valuation gap having been extremely wide for decades. The high valuation of the US market is partly due to the high weighting of technology stocks, but a deeper analysis reveals that the US market is generally overvalued, with the valuation of nine out of 10 sectors higher than that of their non-US peers. Dan Roberts says that based on his valuation discipline, opportunities are often found in non-US registered companies. However, many of the European and Asian companies that he likes have a large portion of their revenue coming from the US. Moreover, many of the large US technology companies do not pay dividends or pay very little, so they are not suitable for his strategy.