Patricia Bannan, CFA
September 29, 2020
The views expressed in the blog and podcasts reflect the assessments of the applicable professionals based on current market conditions and other circumstances and do not necessarily reflect the views of CIBC Private Wealth Management. The views expressed here are for informational purposes only and are not intended to endorse, recommend, or favor either political party or any particular agenda.
Over the past two months, we have focused on analysis covering big picture implications on the economy and overall financial markets as it relates to the upcoming election. In part 4 of our election implications series, we take a more focused look at individual sectors to provide investors with guidance on potential impacts considering different election outcomes. I sat down with the firm’s investment analysts to address top-of-mind questions as it relates to the technology and healthcare sectors to uncover what’s happening behind the headlines.
Senior Equity Analyst Phil Lorenz, CFA, shares his take on the challenges facing the tech sector heading into the election.
Portfolio Manager and Senior Equity Analyst Jim Farrell, CFA dives into the details of widespread healthcare concerns that continue to be newsworthy.
For a written summary of the conversations, please see below:
Technology-related stocks have been a hot topic for investors and investment pundits, given their concentration in many market indices. As of August 31, the top-five S&P 500 Index members—Apple, Microsoft, Amazon, Alphabet and Facebook—accounted for almost 24% of the index, with even higher concentration in the Nasdaq. With the recent reversal of the strong year-to-date performance of these stocks, coupled with the impending election, the topic has continued to heat up. In regards to the election, the most relevant issues are trade, antitrust and other regulatory concerns.
No doubt both presidential candidates’ rhetoric suggests a need to address trade issues with China, with Trump being decidedly more aggressive versus Biden’s more moderate stance. Our analysis suggests the most negatively affected by a ramp-up in trade actions against China would be the semiconductor supply chain, should sales to China-based companies be banned. On the other hand, communication equipment companies outside of China could be impacted positively at the expense of Chinese counterparts. We would be quick to point out that this issue has been highly publicized, is well known, and at least to some extent, is likely discounted in current stock prices.
In a second Trump term, some mega-cap tech stocks could be targeted for regulation on antitrust and data privacy grounds. Under a Biden presidency, actions could be more draconian. Labor regulations potentially affecting companies employing gig workers (independent contractors) could raise prices and hurt demand for services such as ride-sharing. Also, more stringent rules on offshore employment could lead to higher labor costs for services companies, though easing of immigration restrictions could lessen the impact. Arguably the bigger issue surrounds several large technology companies and the claim that they are anticompetitive and should be broken up. We are inclined to believe that the headlines are more incendiary than any actual outcome would suggest. We expect any antitrust work to be exhaustive, and we are not likely to see anything significant happen for years to come, though the heightened attention may lead to continued volatility.
Other factors potentially affecting this sector would be Democratic spending initiatives around 5G and artificial intelligence on the positive side, and any action to reverse the Trump corporate tax cuts as a negative, as technology companies were relative beneficiaries of the 2017 tax cuts.
The main political issues investors are focused on related to the healthcare sector surround drug pricing and insurance coverage for a broader population. Both issues have been prominent in the headlines for several years, if not decades. While Democratic rhetoric has been stronger and louder, these issues are not partisan by any stretch of the imagination. The million-dollar question is whether now is the time major change will be enacted, or if change on the margin is more likely.
In terms of drug pricing, we are inclined to believe that major legislation will be difficult. Various plans have been vetted and considered including utilizing drug importation strategies and direct negotiation of prices for Medicare. Neither is without flaws, and with Big Pharma being important constituents of many Democratic representatives, the odds of moving in either of these directions is low even in the event of a clean sweep by Democrats. Perhaps a compromise of sorts to limit drug price increases or minimize copays is most palatable to all parties.
For insurers, the issue of providing healthcare coverage to a broader population is at the forefront. While “Medicare for All” is likely off the table, there could be discussions to reduce the age of eligibility. Notably, this would be an expensive proposition. Getting the most attention is a public healthcare option which could go hand in hand with strengthening the Affordable Care Act, allowing for more and larger subsidies. While the particulars of such a plan would need to be worked out, it would likely be a negative for managed care players.
Please be on the lookout for our write up and analyst interviews covering energy and financials in the weeks to come. If you have questions, please reach out to your CIBC Private Wealth relationship management team.
Patricia Bannan is a managing director and Head of Equities for CIBC Private Wealth Management. In this role, she oversees the firm’s proprietary equity strategies.
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