An update from manager Fran Radano
In this podcast we are joined by Fran Radano in Philadelphia, manager of the North American Income Trust. Here he talks us through the recent presidential election and whether it's made a difference to stock markets.
Recorded on 20th November 2020.
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Interviewer: Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Fran Radano, Manager of The North American Income Trust. Today we'll be talking about the election and whether it's made a difference to stock markets. Welcome, Fran.
Fran: Thank you.
Interviewer: Now, the election has obviously garnered a few headlines. And after some to-ing and fro-ing, we appear to have a winner. How have markets reacted to Joe Biden's victory and how has that affected the portfolio?
Fran: So first things first, Trump technically hasn't conceded yet. But obviously, for all intents and purposes, we're assuming a Biden presidency, and we're expecting a Republican Senate, which won’t be decided until early January, and a very narrowly held democratic House. I think the effect here of what that looks like will offer probably what we think might be the best combination of sort of pragmatism at the top, and sort of the benefits of a divided government, where the full democratic platform of higher taxes and large spending programmes on certain initiatives will probably be pulled back, if not pulled back entirely. And conversely, some of the Republican platform initiatives are also off the table. So I think you see a pretty good backdrop here. And obviously, it's pandemic dependent, but we do have a vaccine now with good efficacy. So if we look through that, you know, we feel sort of cautiously optimistic.
Interviewer: And have you made any changes to the portfolio in expectation of a Biden win or any other outcome to the election?
Fran: No significant changes, you know, sort of, per usual, but obviously, we're cognisant, you know, if you look at an industry like banking where under a democratic sweep, there could have been higher taxation and more regulation, and to be sure, the regulation is still on the table, taxation, probably less so. Something like that could impact their business in an already difficult time. So we did reduce some regional bank exposure, you know, not massively but thoughtfully. You know, conversely, in a sector like healthcare, you know, we maintained our overweight position, with the belief that the underlying businesses have predictable cash flows. They have demand visibility, and we just believe the single digit multiples of our two core positions, which are Abbvie and Bristol Myers, are draconian at current levels.
Interviewer: And 2020 has obviously been an extremely challenging year, to put it mildly. I wonder if you can give a brief overview of the performance of the portfolio and also any reshaping you've done in the light of the pandemic?
Fran: Yeah, well, as you as you know, 2020 has been you know, it's been a bit of a whipsaw. You know, we saw it at the very start of the year, strong GDP reading. And literally all-time records in both consumer net worth and low unemployment. And wage growth was also strong. So we had a great backdrop coming in, probably something we hadn’t seen in quite some time. And as we know, this fairly abruptly changed as the markets pulled off in February. And the US economy, you know, came to a screeching halt, almost literally by mid-March. Currently, the backup of the second and now third wave during the truly unprecedented presidential election has made it especially difficult for dividend focused managers as dividend yielding stocks were shunned despite very few dividend cuts here in the US. When we look at it, maybe it was the perceived risk of increased taxation on dividends under a Biden sweep, or simply the focus of investors on all things technology related. As far as the portfolio changes, we've made nothing - you know, reshaping is a good word. I think we’ve reshaped some things in the margin. I think what we've done on the whole is that we were able to pick up some very high quality names, that are growers that also pay progressive dividends that had been on our watch list for quite some time, but had high valuations. And in the spring, when we saw stocks sold off indiscriminately, we were able to buy some of those.
Interviewer: Okay, and now we have a potential vaccine, although there's still a couple of stages left to go. The markets have been quite excited about that. Has that changed market leadership at all? Has it changed the sort of balance of valuation for the US market?
Fran: It seems like some days it has and some days it hasn't. I think, you know, as long term investors we do see a light at the end of the tunnel, given the vaccine, you know, test readings from two different providers. But, I think the way we look at it, as long term investors is, we still like our healthcare space, we think the risk total is largely priced in. We also own two defence companies, Lockheed Martin and L3 Harris trading at mid-teens multiples, which seem to be pricing in an outcome that we simply don't foresee. And finally, on the banking side, we own four domestic banks of different shapes and sizes, and we just believe the valuations there do not align with the cash generation or the balance sheet strength. And oddly enough, the bond market of all people would agree with us on these banks, but the equities still have lagged.
Interviewer: And the aim of the Trust is to pay above average dividend income and generate long term capital growth. As you mentioned earlier, it's been a tough year for income. Can you give an update on the portfolio income and the levels of revenue reserves?
Fran: Yeah, so the typical stock in the fund, you know, yield, say 3.5, maybe 3.75%, it grows its dividend at a high single digit clip. Year to date, dividend growth is a bit lower because some companies have just sort of kept their dividends flat. So right now we're looking at dividend growth, and they say 4 to 5% range. And of our 40 stocks in the fund, we've only had 2 dividend reductions. One was a small 14% cut, and the other was a company, Blackstone, who actually pays a variable dividend. And they just announced their final dividend of the year and actually year over year it’s essentially flat now. So you know, the other 38 companies in the fund have paid either a flat dividend or progressive dividend. So that puts us in a pretty good place on the revenue front. Revenue reserves are calculated annually. And, you know, we entered the year with roughly 10 months of revenue reserves. We believe when we close the books on this year in January, that will put the board in a very good position to once again pay a progressive dividend and actually increase reserves even further. We feel very good about our performance on this front in an otherwise, you know, very difficult year.
Interviewer: Yeah, I mean, do you think the worst is over on the dividend front? Or can you still see companies continuing cuts?
Fran: No, I think we feel pretty good about it. I think, you know, what makes the US market a little bit different is there's two ways to return cash to shareholders. There’s share repurchase and there's dividend. You know, for a typical company in the North American Income Trust, majority of that return of money to shareholders is through dividends, but often our companies buy back stock enough to keep the share count flat, or even shrink the share count, you know, 50 basis points, or percent. And what we've seen is, our companies sort of turn off the share repurchase spigot and continue to pay out dividends. So we actually feel pretty good about that. If we look sort of beyond our universe, we actually see some companies actually reinstating their dividend. So I think the visibility is there, and obviously, the vaccine and the promise there, you know, lends some credence to that. So, otherwise we feel very good about dividends and revenues and the ability to pay a progressive dividend.
Interviewer: And just finally a bit of crystal ball gazing if we can. I mean, how are you as 2021 approaches? How are you feeling about the future? Are you reasonably optimistic that companies can bounce back or even thrive after the crisis?
Fran: So it was interesting in the States here, I think, the crisis, what we saw here with many of the large well capitalised companies is that they were actually able to sort of sustain their business and sustain their business model, and many of them have grown share. Unfortunately, it was these small, private, less well capitalised companies that you see on Main Street - they've not only lost share, but they are still feeling a lot of pain. And given the political theatre, you know, in not renewing fiscal stimulus bills, it's continuing. So I think it is a little bit of a bifurcation on that front. I think the biggest learning going forward with corporates and companies in the Trust is a lot of them realise, you know, they can actually manage their business with far fewer expenses than they thought were needed. I would expect more automation, I would expect more use of technology. And the business travel component that people have talked about, I think that will be reduced on a semi-permanent basis or, you know, for quite some time. And then, importantly, I think on a personal level, life in a post vaccine world for many who have been sheltered has the potential for people to embrace life, like they have never before, you know, which will be a fascinating time. I think that that will sort of stimulate the economy and make at least the back half of 2021 a very interesting time when we look back in the history books.
Interviewer: Let’s hope so, that's great. Okay, thank you, Fran, for those insights and for your time today. And thank you also to our listeners for tuning in. You can find out more about the Trust at www.northamericanincome.co.uk. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
What does the upcoming US election mean for markets?
James McCann, senior global economist within the Aberdeen Standard Investment Research Institute, and Scott Conlon, senior US investment specialist, look at the upcoming US presidential election and what this means for the wider economy.
James provides an insight into the election itself, followed by both James and Scott looking at the potential differing outcomes, what this means for markets, and how investors can position themselves accordingly.
Recorded on 26th October 2020.
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Host: Welcome to the latest in our Aberdeen Standard investment trusts podcast series. With me today is James McCann, senior global economist within the ASI Research Institute, and Scott Conlon, senior US investment specialist. Today we'll be looking at the up and coming US presidential election and what this means for the wider economy. James will begin by providing an insight into the election itself, followed by both James and Scott looking at the potential differing outcomes, what this means for markets, and how investors can position themselves. James, can I hand over to you in the first instance?
James: Yes, absolutely. And we're really getting into the exciting start of this race on this, the sprint finish point, especially with early voting statistics telling us that Americans are already voting in very, very large numbers. The latest stats telling us that 60 million Americans have already cast their ballot. Just to provide some context, that's about 40% of the total turnout for the election in 2016, the presidential election there. So we're really in the thick of it. Current polling suggests that the democrats and Biden are in pretty good shape at the moment as things stand. Obviously, in the national polls Biden is enjoying a lead differential of around nine percentage points over Donald Trump. Now we need to be a little bit careful with these national polls because of course, the US election, the presidential election is determined by the Electoral College. So what we can have is obviously a large win in the national polling and in national vote numbers, but that not translating into that electoral college vote. And that's what happened in 2016, where Hillary Clinton won the national vote, protecting her strength in those national polls, but didn't translate into the electoral college and lost that vote to Donald Trump. So what's going to be critical, I think, is thinking about the swing states within that electoral college. There, in general, Biden is doing relatively well, his lead margin is noticeably less than that nine percentage points that's he's enjoying at the national level. In a number of the key swing states like Pennsylvania, Arizona, Michigan, Wisconsin, Florida, North Carolina etc, he is showing polling leads and showing relatively solid polling leads there too. So when we piece this all together, we think that Biden is in a relatively strong position at the moment as things stand – there’s still a week to go - to win the election. We've put about a 75 percentage point chance on Biden winning. We think that the most likely outcome, and what's really important for policy meanwhile, is that Biden wins and you get a democrat sweep. So that means the democrats hold the House of Representatives and lift the senate from Republican control into democrat control. And that would open up a unified government and potential - we'll speak about this a little bit later - for quite impactful, certainly from an economic and market perspective, policy changes. However, the Senate is not a done deal by any means. Certainly, the maths is challenging, and some of the polling races there are relatively tight. So we think there's around a 25% chance that you get a Biden win, but that the republicans hold the Senate, and the democrats hold the house. So you have a split Congress there. And that really, I think, opens up quite a different legislative outlook. We definitely don't think President Trump should be written off, we give him a 25% chance of winning a second term. We think it's most likely that if he does do so he faces a split Congress, given the fact that it looks really, really challenging for Republicans to flip the house. But we have to certainly watch polling data very carefully. We have to watch those swing state data very, very carefully, for signs that either he's crawling back momentum, or that some of the polling errors that infected the last set of voting in 2016, from the presidential perspective, are large again. So when we think about the results, we think it's going to be most likely at the moment that Democrats are victorious. But there's a lot to watch in the week ahead. We want to watch how those swing states are evolving. We want to watch how the early voting continues to evolve – whether that’s matched with very significant voting on the day, what that means for overall turnout. But definitely it's going to be a busy few days, as we sort of looked towards the vote on Tuesday. Of course, this time around, it could be the case because of all the early voting and all the postal voting that we don't know the results on Tuesday. In part that will depend on how close this race is, and certainly it’s not impossible that this turns from sort of an election day to election days or election week even, given the unusual nature of this election against a backdrop of a pandemic obviously. And from an economic perspective, if we think about the outcome of this election, I think it has unusually large implications for policy. Certainly, if we do see that democratic sweep that we’re sort of flagging as most likely at the moment, then the potential for a democratic unified government means that they can really do a lot from a legislative perspective. The first thing they'd probably attempt would be a large, short-term fiscal stimulus package aimed at getting us through this covid crisis. Estimates put that in the region of over $2 trillion, which is obviously very significant and would have a big impact on the short term growth environment. But then more broadly, we know that President Biden, presumptive President Biden, is campaigning on a programme of very significant increases in public spending on things like infrastructure, healthcare, education, social security, only partly funded by higher taxes. So that obviously would create a whole bunch of winners and losers that Scott might talk to a little later. And I think the really interesting dynamic is Biden could win, but facing the split Congress, a lot of that legislative agenda looks pretty much impossible. Now there might be potential for some short term fiscal stimulus, but we think it's a bit trickier to get there, and even if you do, I think it's likely to be much, much smaller than the democrats would prefer. So, you know, obviously, that has implications for the short term growth environment too. If we think about President Trump, I think he would be keen to, and willing to, pass the short term stimulus as well. He's been a little bit more able to combine Democrats and Republicans, particularly budget sceptical republicans in the Senate, so we would expect him to be able to get a short term COVID package through. I think ideally he'd like to follow that up with maybe some more tax cuts, and maybe even some infrastructure spending. It looks pretty tricky for him to get that through a split Congress, maybe he can get some infrastructure through but we’re not completely convinced that he’d have the votes. And then I think the other big difference would be on regulation. So Biden has campaigned on maybe slightly tighter regulation in areas like environmental policy, the financial sector. Whereas I think Trump will continue to push a relatively loose regulatory agenda across the economy really.
Host: Thank you James. And from your perspective Scott, would you like to add to that?
Scott: You have seen some of these areas the marketplace has really led, you know, provide the greatest amount of market leadership year to date, is areas such as in information technology. Some areas within the consumer space, have in fact underperformed since the later part of August, in favour of areas such as utilities, smaller cap has been better in favour over that time period as well. So I think you are starting to see a little bit of the market pricing in the, you know, the kind of post-election outcome with much more favouring, much more support for smaller caps which have outperformed larger caps for more cyclical areas. And other areas that we would expect to see benefits from that Biden clean sweep would be certainly areas that are exposed to infrastructure as well as parts of the healthcare sector. Where other areas of the marketplace we would expect to see underperform under that scenario would be, you know, traditional fossil fuel intensive energy companies, banks, and again, larger cap segments that have a much greater exposure to big tech which may potentially have more regulatory impact in that particular sector, would see those areas underperform under that outlook. Now, another scenario is, what if Biden wins the White House, but of course Republicans hold the majority in the Senate, with regards to how would that impact potentially equities and would we see the same type of sector rotation that I laid out in a Biden sweep scenario? I think our view is that equities would probably be a slight modest correction, which is sort of a reflection of the concerns around a premature withdrawal stimulus and the prospect of tighter regulatory policy in some areas. Cyclical and value stocks may be hurt by lower growth expectations in that scenario, and there's a further drop in the rate outlook. We could see a continuation of the existing strength that was gained in the tech sector here in 2020, given the difficulty of that major regulatory action, absent any new legislation. I think the third scenario , that perhaps we don't assign a high likelihood to currently compared to the other two scenarios, is if Trump is reelected in a split Congress. For me, kind of in that scenario from a view on the equity market, would probably again expect to see some volatility at the index level, largely due to the prospects for smaller stimulus package, which again could hit some of the more cyclical areas of the equity market. While those exposed to things such as trade policy could also be considered higher risk. However, you know, the broader deregulatory forces or focus of a President Trump retaining or residing the White House should benefit some stocks that have been built in risk of a more disruptive level of oversight, including the tech sector which I touched on previously.
Host: Excellent. Thank you, Scott. Very interesting. And a question for both of you - how would you see the US-China relations playing out on both potential outcomes?
James: Maybe I can kick us off there. You know, I think what we've seen from President Trump has been a really unusual approach to foreign policy, particularly trade policies. So he definitely is distrustful of multilateral institutions - he doesn't like things like the World Trade Organisation, doesn't trust that they can persue and fulfil the US’ goals or the goals as he interprets them. He's really gone down the path of unilateral, sort of unusually aggressive trade war style policy. So he's looked at bilateral trade deficits, that they are out of line with what he thinks would be a fair outcome. We wouldn't necessarily agree with the characteristic of how he thinks about trade policy there, but what he's done is try to enforce or change those trade deficits based on a unilateral approach. So he will go to China and say, right, you need to change this aspect of your industrial policy, you need to import this amount of all our goods, or we'll use tariffs as an incentive to try and make you do so. I think it's likely that under a second presidency, or if there is a second chance of President Trump going past that is probably going to continue. It's been one of his major parts of his policy agenda. I think the phase one trade deal is almost in zombie mode at the moment - China not really fulfilling many of the terms that were agreed to there. So I think that opens up an avenue under a second term for that to perhaps come under increased pressure. Maybe more Twitter tirades against Chinese trade practices, and potentially proceed further tariff increases. So I think with a President Trump, we probably would expect more of the same from trade policy. I think under Joe Biden, certainly the tone of trade policy would change. I think he has more faith in multilateral institutions, I think he’ll be keener to work with trade partners, particularly in Europe. So I see less of this direct, tariff based tit for tat trade conflict that we've had under President Trump. I see him trying to work with, again, his allies, particularly on the trade side, particularly in Europe, and trying to address issues with Chinese industrial practices, industrial policy, through those avenues. But I don't think this sort of takes us to a very sort of pro-China, pro-globalisation candidate. We know that the Democrat Party is sceptical around some of the benefits of globalization. A big part of Biden's policy agenda is looking to try and bring back some of the manufacturing jobs that the US has lost. You know, there's a broader sort of cross party distrust around China, particularly around technology and security issues. So I think while the mood music around this conflict will be softer, I think that it may be easier to predict the more conventional in terms of how some of the tensions are played out, but we don't see this as being a sort of a big shift back to a very aggressively pro-globalisation, pro-trade aggressive agenda, leading to a very significant near term improvement in the US-China relations if Biden was to win the presidency.
Scott: Yeah, and I would say, I think the equity markets have probably sort of taken that approach. I don't expect to see major market implications, at least over the near term, related to trade if we do see a Biden White House, particularly with a Biden sweep. I think other areas such as the potential for greater amounts of stimulus, any potential challenges, and certainly to some regard, around regulation, or perhaps even tax policy, is likely to have probably a greater influence on the equity markets here over the near term, as James alluded to. I don't think whether it's Biden or Trump in the White House will largely change the longer term strategic engagement with China, between the US and China which is one that's probably here to stay. But clearly, the approach taken to engage with China will certainly likely be quite different if we do see a change in the White House.
Host: Thank you to both James and Scott for those insights today and thank you to our listeners for tuning in. To find out more about the ASI managed North American Income Trust, please visit www.northamericanincome.co.uk. Do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned here in and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.