The ”no policy uncertainty” and back to TINA trades

Equities 6 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Post the US election technology and health care stocks have been rallying as a Biden victory and senate majority by the Republicans removes the policy uncertainty on corporate tax rate and health care reforms including revising drug prices. We are also observing a collapse in the spot VIX Index and a general downward shift of the entire VIX futures curve indicating that investors are removing tail-risk hedges post the US election changing the narrative back to 'there is no alternative' bidding up equities across the board. The lack of 'Blue Wave' has also punctuated the reflation trade for now sending bond yields lower. Overall, the optimal mix of reactions for the equity market and especially growth stocks.


Global equities are galloping higher post the US election with US technology stocks leading the gains with Nasdaq 100 futures up almost 3% in today’s session extending on yesterday’s momentum. It looks increasingly clear that Biden will win the US election and with high enough margin that a real ugly contested post-election period is out of the question. The senate will most likely not swing into Democratic majority as a result we have very much status quo in terms of the pre-election risk of ‘Blue Wave’ which could have led to corporate tax rate hikes (especially the GILTI tax rate on income from intangibles) and a health care reform. This scenario is getting priced out and as a result health care and technology stocks are gaining relative to other segments. For the energy sector the election outcome is neutral for both the oil & gas and green energy industries. With a Biden victory it seems emerging markets are pricing in a slightly different foreign policy which could lift valuations of Chinese equities

Source: Bloomberg

Another important development after the US election has been the collapse in the VIX Index which has gone from 37 the day before the election to 26 as of today. The entire VIX futures forward curve has moved down in what is most likely tail-risk hedges being removed in the market and that the greatest uncertainty around the election has been removed. Due to the enormous one-way trades in weekly and monthly single stock options by retail investors we do not think that we will go back to the pre-commission free days where the VIX curve was in steep contango with the VIX spot anchored at a very low level. It will be a different volatility market going forward.

With a republican senate control we will most likely not get the big bazooka on fiscal impulse and as such the reflation trade is losing a bit momentum. As a result, government bond yields will stay subdued for some time and that is clearly resuming the TINA (‘there’s no alternative’) trade with the long duration assets (growth stocks, real estate etc.) being bid up in price. The Nasdaq 100 Index still represent the fastest growing companies with strong free cash flow generation and our calculations show that the free cash flow yield on Nasdaq 100 is still around 2% above the global corporate bond index yield-to-worst indicating an aggressive premium on growth stocks but not something to fear. The growth stocks segment also provides compounding on revenue in the case inflation comes after all, so our view is still that investors should have an overweight position in growth stocks.

The chart below is for regulatory purposes.

Source: Bloomberg
Source: Bloomberg
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.