(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you synthesize this, things may have changed.)
Macro Dragon: Trading the US Elections on a Trump / Biden Victory, plus navigating a potential contested scenario
Part 3 of 3 in our views on potential equity pathways & tactical views for the US elections. For a full cross-asset run down, our VIPs can reach out to their GST/RM rep. to set up a call with our Strategist - including KVP.
Scenario One: Biden | Democrats Congress Victory
- Once again – this is predominantly from a tactical & event-driven, near-term price action view. Folks should be well aware of the long-term Liquidity Leviathan framework that we have been talking about for months on the Macro Dragon
- Generally harder to know how much is priced in on Clean Energy & Infra. names, yet next big likely kicker is on Biden & Dem Sweep confirmation – naturally, a function of how we trade going into next wk’s elections (bullish or bearish, neutral) – as well as eventual stimulus.
- In addition to pure plays like TSLA, clean energy etfs such as ICLN, QCLN, SMOG & PBW could see sustained interest. As well as copper, nickel & other base metals.
- Despite a lagging energy sector – the paradox of a Biden admin. = likely better for demand/supply dynamics for oil – the initial reaction is likely to be negative for the oil & shale players, including fossil fuel etfs like XLE, KOL & ENFR. Yet here, KVP would be more inclined to monetize the volatility by cash-secured selling of puts, given the view of wanting to be strategically long the battered energy space (i.e. fossil fuels are not going off a cliff anytime soon, under owned, hated, its contrarian, etc)
- The big tech names & in particular FB, GOOGL & APPL – where it’s a clearer case of monopoly than say AMZN – would likely come under near-term pressure.
- A Biden victory would also likely viewed as generally net positive for China related names & ripple into EM assets as a whole. At the very least the world would expect a more stable & consistent message, as well as rules of engagement.
- Country etfs like FXI (CH), EWZ (BZ), EWA (AU) & China Tech single stock names like Alibaba [BABA] , Ant  Tencent  could see a wave of demand.
Scenario Two: Trump| Republican Congress Victory
- Likely to be a huge relief rally for fossil fuels such as oil, shale & coal players – be they single stock names like Exxon [XOM -55% YTD], Chevron [CVX], Pioneer [PXD], Concho [CXO] or etfs XLE (energy -54% YTD), KOL (coal -27% YTD), ENFR (energy infra)
- The Dragon loves the energy space & what’s there not to love:
1. Its under owned.
2. Its massively underperformed.
3. There is still decent yield offering even with div cut assumptions.
4. Valuation wise it cheap.
5. Its contrarian & out of favor, even vilified by many - its the anti-ESG.
6. The downside is likely capped when you have things like Exxon & the energy etf XLE down over 50% YTD.
7. Fossil fuels are not going extinct anytime soon, Biden himself said likely 2050.
8. The world will eventually open up & guess what? That's right we’ll need energy for any major infrastructure & industrial bill.
- Can see scenario where 1-2yr 10% OTM long-dated calls in the space can return +3x to 5x, if we get a rerate to $50 to $60 oil over that period.
- Green Tech would likely take quite a beating with individual names such as NextEra [NEE], Tesla [TSLA +385% YTD] & especially Nikola [NKLA +90% YTD] coming under pressure, but etfs like TAN (solar) & ICLN (global clean energy) which are not only c. +210% & +133% from Mar lows, but also trading at ATHs.
- We’d likely see a relief rally in some of the Tech-antitrust names such as Facebook [FB], Apple [AAPL], Amazon [AMZN] & Alphabet [GOOGL] – i.e. as anti-trust concerns would be deemed less of a concern in this scenario. Flipside is likely neg. for CH & EM Space.
- We could also see a pullback in some of the infrastructure plays, based on an anticipated smaller & slower infra bill from a republican controlled WH & Congress. So etfs like IFRA, XLI, IGF as well as single names like Brookfield Infra. [BIP], Caterpillar [CAT], Deere & Co [DE], Union Pacific [UNP], United Rentals [URI], Ericson [ERIC], Nokia [NOK].
Scenario Three: Contested Outcome Focus
- The playbook of higher volatility [VIX & MOVE], USD [DXY], Gold [XAUUSD], Yen[short EURJPY &/or USDJPY ] & US Treasuries should be the path of least resistance, if we are flat-to-up going into the election results.
- Again, the challenge here is a scheduled volatility event & current consensus view. I.e. if we sell-off heavily going into the elections, then further downside may be limited.
- To KVP, cash-secured selling of volatility through puts makes sense – likely in two to three tranches to diversify on time & lvls. Can be a great opportunity to add to long-term strategic holdings, by selling cash-secured puts, where you can “get paid” to get long if your puts are called & in the “worst” case scenario you keep the premium
Look for potential shakeout in some of the better performing infrastructure, renewable & tech names, based on the thesis that regardless of administration, we will eventually see a massive stimulus & infrastructure spend that should benefit the machine & equipment makers, transportation & logistics players, as well as port, airport & storage operators.
Scenario Four: No Sweep, Divided Parties in WH & Congress
- This would be the “worst” case perspective from a viewpoint of expecting infrastructure sooner & at a magnitude that matters. A Biden WH, with a Divided Congress could initially roadblock any chance of a major stimulus & infrastructure bill (huge negative), as well as likewise with a Trump WH & divided Congress.
- Increased probability of formal YCC & negative rates, which will be especially positive for the monetary debasement themes of being long the precious metals complex (gold, silver, etc), be that through miner etfs like GDX, GDXJ, SIL or names like Barrick Gold [GOLD], Newmont [NEM], Newcrest [NCM], Wheaton [WPM], Pan American [PAAS].
Dragon Heavy Rotation
- In case you missed it over the weekend, the first in hopefully a string of exclusive video series interviewing exceptional professionals with skin-in-the-game.
- We kicked off with Singapore Based, AVM Global Opportunity, run by the talented & always exceptional Ashvin Murthy.
- The timing of the interview is uncanny as it was at the cusp of the last US presidential elections that AVM was launched.
- It’s worth noting since the interview, the fund has also been nominated for the Singapore’s Best Hedge Fund of 2020, given its consecutive five straight positive months at the start of this volatile year.
- Saxo’s US Election Cheat Sheet Which cuts into the three potential pathways into the elections, probabilities around them, as well as short & long-term positions across equities, bonds, commodities & currencies.
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