At a time when conflicting voices are raised as to when full recovery will arrive, we are pleased to present below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

The US Election and Your Investment Portfolio

Madison Darbyshire, Financial Times
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The US election has traditionally been a time of increased uncertainty for equity markets, and this year is no exception. In particular, market forecasters are looking to the margin of victory for either candidate as an indicator of where markets will move – for instance, a Biden win with a Democratic sweep of Congress could pave the way for increased regulation and higher taxes, traditionally a negative influence on the markets. On the other hand, if Mr. Trump were re-elected without a significant shift in Congressional power, investors believe the status quo would continue, despite friction with China. That said, Vanguard has found that elections have little to no impact on historical returns, and annualized volatility was about 2 percentage points lower in the 100 days preceding and following an election. A 2017 study shows that the impact of an election on the market is tied strongly to investors’ optimism – an investor whose preferred candidate wins is more optimistic and therefore more bullish than one whose candidate loses. The consensus among analysts is that short-term election anxiety should not unbalance a well-structured long-term investment plan.

The Lessons of Germany’s Coronavirus Response

Dirk Kurbjuweit and Lydia Rosenfelder, Spiegel International 
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Though Germany’s response to the Covid-19 pandemic has been widely praised, there are many lessons to be learned from Germany’s mistakes over the last seven months as well. The authors explore Germany’s pandemic response from several different perspectives: The Doubter, The Decision Makers, The Numbers Guy, The Critic, and The Reformer. Though René Gottschalk, head of the Public Health Department in the city of Frankfurt, was fervent in saying “if people consistently wear masks, the nightmare would be over in a few weeks”, Chancellor Angela Merkel and her staff initially doubted such a statement, even believing masks might be counterproductive. Instead, they imposed a moderate lockdown with little initial regard for masks. As revealed by interviews with a couple of Decision Makers, the response to the pandemic varied across Germany’s 16 states. Some state leaders, like Markus Söder, made decisions that personified a strong, decisive state whereas his counterpart Armin Laschet was full of self-doubt, growing almost melancholic. From their analysis of the Decision Makers, the authors conclude that Germans prefer the appearance of certainty and a tendency towards the authoritarian. Numbers have given some such feelings of certainty, but we should be careful to fixate on the pandemic statistics that dominate the headlines since they aren’t enough to paint a complete picture. 

The perspective of the Critic reveals how dangerous such a fixation can be. Christian Piwarz, a member of the Christian Democratic Union party and education minister in Saxony, says Germany had developed a dependence on virologists, ignoring other scientific perspectives. This could be seen in the controversy over reopening German schools where most virologists opposed restarting normal school operations, but pediatricians advocated to reopen as many children were suffering physically and mentally from the lockdown. The lesson that can be gleaned here is that interdisciplinary discussions among all scientific disciplines should be held to come to the most appropriate solutions. Finally, the Reformer highlights the need for us to prepare and protect ourselves from viruses, “We protect computer networks from viruses, but not our real lives. I see this as a grave mistake” says Bodo Ramelow, the governor of Thuringia. In conclusion, the state made a lot of right decisions and many mistakes which can be learned from. However, it is primarily up to the people of the country to reign in the state’s tendency to limit freedoms. If more people follow the rules, the less politicians will have to create new rules in an effort to squash the virus. 

What Ant Group’s IPO Says About the Future of Finance

The Economist

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With over a billion active users in 2019 and a total payment volume of $16 trillion, Ant Group’s Alipay has had a profound impact on the digital payments industry, propelling China to the forefront of digital transactions while giving entrepreneurs and consumers greater access to loans. Ant uses a four-pronged business model – payments, lending, asset management, and insurance – to fund its stellar growth, building an enviable network effect. While state regulatory hurdles pose some threat for the private company, Beijing also appreciates how Ant’s technology allows them access to more granular money flow data. Competitors (notably Tencent, developer of Chinese super-app WeChat) have made inroads into digital payments, but their footprint is far smaller due to Ant’s integration with Alibaba, which accounts for half of Chinese online retail. Its lending business poses a significant credit risk, as unsecured lending to small borrowers is always risky. On the other hand, its 2.9% delinquency rate is better than most Chinese banks, likely due to a network effect with Alipay and Alibaba. While its focus on small-scale loans rarely puts it in conflict with those banks, Ant nevertheless relies on them for funds, which may create tension down the road if the banks come to view Ant as a more direct competitor. The company’s global ambitions have also been stalled by concerns over security. Nevertheless, Ant Group’s ecosystem provides a wealth of opportunities for growth, and the company intends to continue its innovation in the technological finance sector.

Industrial Stocks Are Getting Ready for 10 Years of Outperformance. Here’s How to Play It.

Al Root, Barron’s
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For the last decade, the industrial sector has not been the place to invest if you desire to outperform the market. However, the software boom has begun to move from the consumers of technology to the producers of technology. Caterpillar and Rockwell Automation are two such companies that are harnessing the powers of data and automation which will make their bottom lines more profitable. This, combined with the trend of renewable energy replacing the business lost from the decline of fossil fuels, is making the industrial sector a new place for investors who want to outperform the market. There are market signs that industrials are about to overtake technology in the next decade. Tech stocks trade at 31 times 12-month forward earnings estimates while industrials are trading at 24 times earnings. This seven-point gap is the largest since the early 2000s and is a potential sign that tech is peaking. Companies, like Rockwell Automation, are betting on growth to continue. Recently, Rockwell Automation announced a partnership with Microsoft, bringing Microsoft’s software expertise alongside its industry expertise. While servicing oil companies will remain a huge business for industrial companies, the tipping point towards renewable energy means there is a massive need for additional equipment as well as software. This article mentions five stocks that Barron’s believes will prosper on the trends of electrification, automation, and data: Schneider Electric, Eaton, Caterpillar, Quanta Services, and Rockwell Automation.