December 15th, 2015

A fund manager at a $468 billion firm pinpoints 7 portfolio moves to make right now in anticipation of a Biden presidency and Democrat-run government

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Summary List Placement

It's become an increasingly popular view on Wall Street, despite once seeming counterintuitive: a Joe Biden win and Democratic sweep will be good for markets.

At least in the near term.

That's because Democrats want to deliver a massive second coronavirus stimulus package worth at least $2 trillion, compared to a lighter version preferred by congressional Republicans. And a larger package will support consumer spending — the driving force behind the US economy — and in turn, corporate earnings.

And chances of a Democratic sweep are growing. Wealth management firm Raymond James recently upped their chance of Democrats controlling the presidency and both chambers of Congress to 55%, from 50%. They also give Joe Biden a 65% chance of winning.

In an Oct. 20 webcast hosted by Franklin Templeton, Julien Scholnick — portfolio management at $468.5 billion Western Asset Management — broke down how investors might position their portfolios in the case of a Joe Biden win and a Democratic sweep in Congress.

He pointed to seven moves in particular that he thinks would benefit from the large stimulus to presumably be delivered in the case of Democratic-run government.

7 portfolio moves to make in the case of a Democratic sweep

Though Scholnick said that Democratic plans for higher taxes and regulation are headwinds facing the market, he said that these measures will not be their first priorities while the economy recovers. So in the near term, he said, markets will reap the benefits of stimulus. 

Perhaps most obviously, then, Scholnick recommended investors look toward cyclical stocks, which benefit from a jump-starting, early-cycle economy.

Investors looking for exposure to cyclical stocks might consider and exchange-traded fund like the Vanguard Consumer Discretionary ETF (VCR). 

Next, he said he will look toward both lower-risk and higher-risk credit

"The near term boost would be positive for risk assets, and specifically we're looking at assets here domestically in the US, so that would include investment grade credit, high yield credit," Scholnick said. 

He added: "When you look at spread levels in those markets, you're still trading at spread levels wide of where you were prior to the pandemic. That makes sense, we had a huge shock, a very sharp retraction in growth. We've recovered some of that in a short order, but there's still some more recovery to go."

Products like the iShares Long-Term Corporate Bond ETF (IGLB) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) offer exposure to lower-risk and higher-risk credit, respectively. 

Further, Scholnick said commercial real estate and housing markets will see boosts from a robust second stimulus package.

"Away from the credit areas of the market, you could look at areas of the market that have not received such direct support, areas in the structured portion of the market: commercial mortgages, the housing market, where support hasn't been as direct by the Fed," he said. "And certainly those areas of the market would continue to benefit by an increased recovery in a broad-based US recovery."

The SPDR Dow Jones REIT ETF (RWR) offers exposure to the broader real estate market. 

Finally, he said investors might look to emerging markets and emerging market currencies.

"Looking outside the US, if we think the US is doing well and the economy is recovering, that reduces the need for the type of safe haven assets, and maybe some of that demand is lessened and some of that dollar is lessened," Scholnick said.  

He added: "And in that regard you could see emerging markets and emerging market currencies do well, and that's sort of the pattern you saw in the July and August timeframe when the dollar weakened when the expectations that growth would continue to do well."

The Schwab Emerging Market Equity ETF (SCHE) offers exposure to emerging market equities, and the WisdomTree Dreyfus Emerging Currency Strategy Fund (CEW) offers exposure to emerging market currencies. 

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SEE ALSO: MORGAN STANLEY: Buy these 61 stocks that will offer major earnings-driven upside following an imminent 10% market sell-off

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