David Kimberley
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Updated 26 Jan 2024
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

The electoral stars have aligned this year, with the citizens of several major economies set to go to the polls in the months ahead. Some of these are done deals. I doubt many readers will be waiting with bated breath to see who emerges victorious in bastions of freedom such as Russia and Venezuela.

Other countries have less certain outcomes. Who will win in the Land of the Free, for example? It’s hard to say. We don’t pretend to be great political forecasters but, if only for our own amusement, it’s interesting to see what fears people have and what areas of the market are perceived as being likely to be affected by these elections.

India

The world’s largest democracy will head to the polls in a drawn-out election that takes place across April and May. Most polls suggest incumbent prime minister Narendra Modi will remain in power.

The view seems to be that markets will perform badly if that does not happen. Jefferies’ Chief Strategist Christopher Wood noted in November that he expects the country’s stock market to decline by 25%, albeit with a bounce back, if Modi loses. The reason for this seems to be a vague sense that Modi is pro-business and others are not.

The bounce back point is key and Wood argued that this is likely to be because of India’s hard to slow momentum, with rapid infrastructure rollout, uptake of financial services, and increasing consumption all tricky to stop. It is difficult to argue with this and it’s worth noting that many of the changes we’ve seen in India in the last decade would be hard to turn back, nor is it easy to imagine any government wanting to do so.

For example, data from the IMF shows that more than 1.2bn people have taken up the government’s digital ID since it was launched in 2011. Over 600m have used that ID to open a bank account. India’s motorway system has also more than doubled in size since Modi took office according to research by Gavekal. Cheaper labour costs and accommodating government policy have also seen more manufacturing move to the country. Apple has said it hopes to manufacture 25% of its iPhones in India by 2025, for example.

Unless they plan on ripping up roads or actively encouraging foreign companies not to invest in the country, it’s hard to see why a new government would change these things. Arguably a more pressing concern for India investors, politics aside, is valuations.

The Nifty 50 are trading at some of their highest levels of the last two decades at over 20x forward earnings. However, it’s worth noting that companies in the MSCI India Index saw earnings growth of 61%, in dollar terms, from the start of 2021 through to the end of 2023. Clearly when you get results like this, a higher valuation starts to justify itself.

Ashoka India Equity’s (AIE) strategy may be of interest in this regard. The trust has been the top performer in its sector since IPO in 2018 and, although the managers run a more growth-oriented strategy, they are valuation conscious and won’t invest unless companies have solid corporate governance and the cash flows and earnings growth to justify doing so.

The US

One sector that looks surprisingly absent from the US political debate this time around is healthcare. In the past the prospect of government largesse in the field was a punching bag for the right and a selling point for the left.

This dynamic doesn’t hold as much as it once did, primarily because Trump doesn’t seem to care much. There is no mention of healthcare on his Agenda 47 website that details his plans for his prospective presidency and he has said explicitly that he won’t cut Medicare. Regardless of whether you believe him, the result is that healthcare is not really in the spotlight in the way it may have been in the past.

The sector is also at an interesting juncture, having seen lopsided returns over the last 18 months, with obesity drug manufacturers Novo Nordisk and Eli Lilley seeing huge surges in their share prices relative to the rest of the sector. In contrast, small and mid-cap firms have been hit by higher rates and seen steep falls in valuation.

For example, 30% of NASDAQ-listed biotech companies were trading at negative enterprise value at the end of 2023. In other words, the amount of cash on their balance sheet was greater than their market cap. Similarly, Janus Henderson fund managers Andy Acker and Daniel Lyons noted in November that the S&P Biotechnology Industry Index was trading at a 25% discount to its 30 year average, on a forward p/e basis.

With that in mind, we think International Biotechnology (IBT) and Bellevue Healthcare (BBH) are worth watching. Both trusts have had a good run of performance since the start of December but are below their all-time highs, despite strong results for companies in both underlying portfolios.

Mexico

Given that Trump has said he wants to declare drug cartels terrorist organisations and use military force to stop them, it’s plausible his election would be more damaging to Mexico than healthcare companies.

The former is also holding elections this year, with most pollsters predicting a victory for Claudia Sheinbaum, a member of Morena – the political party of incumbent president Andres Manuel Lopez Obrador.

Fidelity Emerging Markets (FEML) is notable in having an overweight position to Mexico, with the managers arguing that the nearshoring trend provides some tailwinds to the country. That Mexico became the largest exporter to the US in 2023 is a simple sign of that. Part of the managers’ exposure is through mining and infrastructure conglomerate Grupo México.

There are no guarantees that will continue but on the political side there seems to be no appetite for change from either party. In fact, both of the major candidates have said they want to increase Mexico’s role in supply chains so it is hard to see that trend being under threat politically.

It’s also worth noting that Lopez Obrador is generally viewed as a Bolivarian inspired left wing populist and has arguably done very little to encourage this state of affairs. Yet sentiment towards the country is extremely positive.

The UK

We all know that UK valuations have been at low levels since 2016. This is heavily sentiment driven with uncertainty around Brexit agreements, Covid, rapidly changing prime ministers, inflation, and now the prospect of an untested labour government all compounding the problem.

The FTSE All-Share rose by almost 13% in the half year period after Labour last won an election. There is hope yet.

Joking aside, there are really two things worth thinking about here. One is that UK equities are already so discounted relative to peers and their own historical average that you could argue there isn’t much more room to go. Today the MSCI UK Index is trading below the equivalent US, Europe, Japan, and emerging markets indices on a forward earnings basis.

The other factor to consider is that Starmer seems fairly up front about being more centrist than his predecessor. There appear to be few nasty surprises lurking behind his prospective premiership. As the last eight years in UK equities show, markets don’t like uncertainty – but looking at the various tumultuous incidents we’ve experienced in that time, does Starmer really rank above the Brexit vote and a pandemic?

The point being that UK markets are already lowly valued and sentiment extremely negative. Starmer may be less friendly than the current government but it’s worth remembering that they have hardly been true blue libertarians themselves.

With that in mind, we think Invesco Perpetual UK Smaller Companies (IPU) is worth looking at. The managers have just used gearing for the first time in years. The managers believe the outlook for attractively valued UK small caps has significantly improved, with earnings in the underlying portfolio also remaining strong.

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