Hamish Douglass, the CIO of Magellan Financial Group, who oversees the largest Australian-owned global funds manager and is the current darling of the wholesale and retail investor sectors, is relatively sanguine about the possible market impact of the US election, but a bit more worried about COVID-19.
Douglass, also Magellan’s co-founder, with Chris Mackay, chairman and the wealthiest fund manager in Australia, according to the BRW Rich List, also alongside Chris Mackay, held a regular Q&A session with investors and advisers last week (October 13). Their worries would have been soothed, if their spirits were not totally buoyed.
Douglass couldn’t come close to answering the more than 300 written questions from his audience, but covered the two main macro concerns on their minds and the main micro one:
. what are the likely scenarios and fallout, if any, from the US election and how is the pandemic likely to continue to impact markets
. and, the main micro question: how is the portfolio positioned? One suspects this was the more pertinent question for the audience.
On the looming election, billed as the most important in US history, Douglass believes that it will all come down to whether a victorious Democratic Party would choose to use its power, if it has enough of it, to change the Senate rules so that a simple majority is all that is required to enact significant change.
Douglass referred to the Senate’s ‘Filibuster Rules’, which involve a tactic which allows a senator to prevent a measure from passing by simply speaking on the subject for a long – often very long – time. In order to bring it to an end, which is called ‘cloture’, 60 out of the 100 senators need to approve so. The Democrats currently have 47 senate seats to the Republican’s 53 and will struggle to get to 50, let alone 60. There has been speculation a Biden White House will seek to change the rule, which has been increasingly used in the past couple of decades.
Douglass assumed that Biden, currently given by bookmakers an 80 per cent chance to become president, would take the White House and probably win the lower house, Congress. He may also take the senate – which would be Douglass called the “trifecta”. Winning that trifecta would still not be so bad for markets, because the new president would not be able to introduce more extreme left-leaning legislation. But a fight over the filibuster rule would be.
The other concern for markets, he said, was a close vote which would probably lead to an “ugly contest” with Trump. This was because of the uncertainty which accompanied it. “Markets don’t like uncertainty, although that will be for a relatively short period.”
More uncertain were the scenarios resulting from the pandemic, which tended to hinge on a successful vaccine. Frank Casarotti, Magellan’s general manager of distribution, reminded Douglass that he had previously said the impact could mean anything from a 50 per cent fall in markets to a 20 per cent gain.
Douglass said: “There are a lot of known unknowns around the vaccine and the medical pathway to fight the pandemic. There has been considerable progress with vaccine trials, but no completed phase three trial as yet, and progress with potential therapeutical treatments for people who are already infected.”
He said there had been a lot of reluctance among governments around lockdowns and society seemed to be less fearful than it was. Emerging markets were showing surprising resilience even though the virus was “running rampant” in many. The economic downturn among emerging markets was not as bad as had been expected.
The Magellan portfolios
With respect to its own portfolios, Magellan has recently been “selectively” reducing its cash levels and has “tightened” the bounds of an extreme downside risk.
While a Biden presidency would very quickly institute more stimulus, it was also likely to increase corporate tax from 21 per cent to 28 per cent. Magellan’s portfolios have moved to more international, ex-US, exposure. “You also want to be careful around healthcare (with a Biden presidency),” he said.
The manager was also mindful about possible legislation impacting the technology industry. “We’re carefully monitoring that because of our exposure there,” Douglass said.
With respect to its big exposure to Chinese technology, mainly through Alibaba and Tencent, Magellan remains comfortable, notwithstanding trade tensions with the US and elsewhere. The Chinese tech exposure add to the portfolio’s diversification and only a small part of Alibaba’s and Tencent’s business comes from the US. Their businesses could grow strongly for the next 10 or more years.
Alibaba, which is Magellan’s largest single-stock holding, is well advanced with an IPO of its financial services divisions which will be the largest IPO in history, considered to start with a market cap of more than US$300 billion. Douglass believes the new company, to be known as Ant Financial, will be oversubscribed and it will be difficult for everyone to buy stock before listing, notwithstanding the size of the float.
Douglass said he was cognisant of current valuations among tech stocks and recently sold Apple because it had passed the manager’s view on valuations. “But the market disagreed with us,” he said. “We want to build resilient portfolios to expect the unexpected.”
Greg Bright is publisher of Investor Strategy News (Australia)