It’s not long to go until the US election and Joe Biden is leading the polls. The prominent 538 blog puts Biden’s chances at around 85%, The Economist has Biden at 90% and betting odds suggest a figure around 68%.
As we move closer to the election, and with some votes already been cast, it does seem that Biden has the edge and this fact is already being priced into financial markets.
For example, if we look at stocks that are closely linked to a Biden win, TAN, the Invesco Solar ETF, is up 69% on the quarter. XHB, the S&P Homebuilders ETF, is up 23%. Vista Outdoors, a company that supplies hunting gear and ammunition, is up 42% and NEE, a large cap green stock is up 16%. These outliers compare to a broader market return of only 9%.
Most of these moves make sense. Biden is promising to invest $1.3 trillion into American infrastructure projects that are sure to benefit homebuilders, construction companies and materials stocks. He also wants to invest heavily into green energy and the electrification of vehicles and trains in order to tackle climate change.
Let’s be clear, not all stocks linked to a Biden win are worthy long-term investments. Some stocks like Workhorse (electric trucks) and Canopy Growth (Cannabis) have no track record of profitable earnings and have a lot to prove. Moreover, a focus on green energy and gun stocks could fade once election pressures subside.
The big question is if there are any gains left or are they mostly priced in?
In some ways, risk:reward is more favourable for a Trump victory at this point. If Trump wins there will be a monumental shift in sentiment. Money will pour out of the green trade and move back into energy stocks like XOM. Even if Trump only has a 2 in 10 chance of winning the election, the payoff from shorting a green trade like TAN might be worth it.
Personally, I feel OK with sticking with Biden at this point. The polls are more stable than 2016 and there are indications on social media of massive voter turnout (with much of it looking blue).
It’s for this reason that I have recently taken positions in a number of Biden linked trades in my discretionary portfolio. I have Alibaba which should benefit from a loosening of Chinese tensions, TPI Composites, a company that supplies the blades for wind turbines and I also picked up Beacon Roofing. With a $2.4 billion market cap, the company is well placed to benefit from both infrastructure spending and green initiatives.
With all that said, I find it hard to believe Biden’s chances are so close to 90%. There is a lot of uncertainty with this election thanks to COVID-19 and rumours of voter suppression. There is also the possibility that Trump won’t accept the result and we face weeks of turmoil. This article from the Atlantic points to some worrying possibilities.
I also know from past experience the difficulty of predicting election results since I got both the 2016 election and Brexit wrong. So perhaps I’m not the best person to listen to. However, I feel more prepared for this election and I’m willing to take the risk on these trades.
Disclosure: Long BABA, TPIC and BECN.
This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided.