Beaten-up sectors rebounded after Biden win

Despite uncertainty around which party will control the U.S. Senate and the threat of alleged voter fraud lawsuits, North American investors seem to be looking on the bright side following a tight U.S. election.

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“The market reactions are very optimistic,” said Natalie Taylor, a portfolio manager at CIBC Asset Management, during a Nov. 9 interview.

“We’re seeing sectors that have been beaten up over the last few months, such as aerospace and financial service companies, really rebounding quite strongly,” as investors look to “a normalization in the economy,” said Taylor, who manages the CIBC Dividend Income Fund.

Once results started coming in on Nov. 3, markets realized that a large-scale Democratic sweep was unlikely, Taylor said, which meant “the risk of more left-leaning policy was taken off the table.”

That translated into strong performance for technology and health-care stocks, two of the sectors most vulnerable to regulation in a Democratic Washington.

What that also meant, however, was a tempering of “the idea of aggressive fiscal stimulus that the Democrats have been pushing for,” which put a damper on gold and bond yields.

Yet, as president-elect Joe Biden’s victory came into focus last week, “We saw a catch-up of the cyclicals, and a rebound in gold and [bond] rates as optimism around stimulus returned,” Taylor said. “Despite the uncertainty in the days following the election, markets were relatively strong. We think this continues.”

The S&P 500 last week recorded its biggest weekly gain since April, and it continued to rise this week on optimism around a Covid-19 vaccine.

“We think that there’s a strong economic recovery that looks firmly ingrained at this point,” Taylor said, pointing to “strong consumer balance sheets and spending, which has obviously been aided by government transfers and a return of employment over the last few months.”

While her outlook isn’t based solely on the election result, Taylor noted that a Biden presidency “accelerates” her investment thesis in a few areas, including clean energy.

Under Donald Trump the U.S. withdrew from the Paris Agreement on climate change, but Taylor finds that “Biden’s commitment to renewable energy could unleash meaningful growth in the U.S., although his efforts might be somewhat hampered by a divided government.”

One company that stands to benefit is Toronto-based Northland Power, a producer that develops, builds, owns and operates renewable power assets across the globe.

“[Northland] operates primarily in off-shore wind development, which is a higher-return and less competitive segment of the renewable market,” Taylor said, and one the U.S. has “yet to explore meaningfully.” The company’s valuation is also among “the most reasonable in the sector,” she said.

Taylor also expects a broad U.S. infrastructure package, which could help sustain the economic recovery.

One Canadian company that could benefit in that space is Montreal-based infrastructure consulting firm WSP Global Inc. The company’s valuation is “undemanding,” Taylor said, and it could benefit from industry consolidation.

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