Donald Trump is likely to ramp up his anti-China rhetoric and “throw the kitchen sink” at the US economy in a bid to win this year’s election, according to Fidelity’s Aditya Khowala, giving investors some uncertain conditions to navigate.
The US continues to see rising coronavirus infections and deaths. Last week, the country reported more than 40,000 daily cases on four occasions and had over 50,000 new cases in one day for the first time, according to Johns Hopkins university data.
With the US is set to hold its presidential election in November this year, incumbent president Donald Trump has started to lose ground in the polls to Democrat rival Joe Biden. The coronavirus crisis and its economic impact will loom large over the election.
It is very rare that an incumbent US president is re-elected when there’s a recession in the election year. No-one since Calvin Coolidge in 1924 has been re-elected when there was a recession within 24 months of the polling day.
Not that we didn’t see Trump defy election day odds during his first presidential campaign, as the day before the vote data compiled by The New York Times had his Democratic rival Hilary Clinton on an 85 per cent chance of winning.
The coronavirus crisis caused the fastest bear market in history, with US stocks dropping 20 per cent in just 16 days. However, asset prices have rebounded sharply due to central banks and policymakers pumping trillions worth of stimulus into the economy.
This rally, which started at the end of March, has been led by the mega-cap tech stocks which have dominated the market index for years. So far in 2020 the MSCI North America index has outperformed the MSCI World index, making 4.16 per cent versus 1.33 per cent.
Indices year-to-date
Source: FE Analytics
But while US markets have almost recovered from the coronavirus sell-off, the economy is faring much worse. In June, the private non-profit research organisation National Bureau of Economic Research – which makes the call on the health of the US economy – said the country was officially in recession.
Aditya Khowala, manager of the $724.1m Fidelity American Growth fund, said Trump will have to factor this coronavirus-triggered recession in his 2020 presidential election campaign.
“The speed and depth of the Covid recession has thrown a big wrench in Donald Trump’s original strategy of campaigning on a very strong economy,” he said.
“I see Trump deploying a two-pronged strategy to try and beat the odds: first, re-escalate the trade war and dial up the rhetoric against China to position it as a scapegoat for the recession; and second, throw the kitchen sink at the economy to make sure that it is in full swing before November.”
Step one: Re-escalate the trade war with China
Back in 2019 the tensions created by the US-China trade war dominated headlines, as did the news of a ‘Phase One’ deal being signed at the start of this year. At the time, many said this would bolster Trump’s re-election odds.
But the outbreak of coronavirus changed that and the underlying political agenda of the trade war is being laid out in the open more than ever as Trump openly blames China for the coronavirus outbreak.
On this the Fidelity American Growth fund manager said: “Recent opinion polls clearly show that the majority of Americans blame China for the global pandemic, which has given the Trump administration a perfect scapegoat.
“Anecdotal evidence for this view can be seen in Trump’s recent and repeated references to the outbreak as a ‘China plague’ or US trade representative Robert Lighthizer haranguing US companies to move their supply chains out of places like China, which he accuses of unfair competition.
“It’s a strategy that appears to have worked so far for the administration, as the negative views of China continue to grow in the US. Relations between the world’s two biggest economies look set to get worse in the medium term.”
Step Two: Juice the economy through all means possible till November
Although Trump continues to shift the blame of the coronavirus very publicly onto China, this won’t be enough to win voters over during the harsh economic reality, Khowala said.
The US unemployment rate rose drastically to 14.7 per cent in April following the coronavirus outbreak. While June saw 4.8m new jobs created in the US and employees began going back to work with businesses reopening, unemployment rates are still well above pre-coronavirus levels at 11.1 per cent, according to the US Bureau of Labor Statistics.
Source: US Bureau of Labor Statistics
To rebuild the backbone of his re-election campaign – a thriving US economy – Trump has to do something unaccustomed to him, go along and work with the Fed.
“Trump knows that simply blaming China will not be sufficient for him to win re-election, and that he also needs the economy to stage a strong rebound by November,” Khowala said.
“I see this as a key reason why his administration has chosen to reopen large parts of the economy without waiting for clearer signs the outbreak was effectively suppressed, as was the precondition for easing lockdowns in many places in Asia and Europe.”
Although this might mean the US economy stages a faster short-term recovery, it also increases the risk of a second or third wave of infections.
Khowala also noted that Trump is getting “enormous help” from the Federal Reserve, which has essentially committed itself to unconventional policies such as helicopter money and ‘quantitative easing infinitum’. The central bank has indicated that rates will be kept at zero until at least 2022 and seems to be prioritising a recovery in the job market over the risks of exacerbating asset price bubbles.
In additional, US Congress has approved “exceptional measures” for fiscal support. The Fidelity manager noted that some workers are receiving unemployment benefits that are more than their wages, causing the household savings rate to shoot above 30 per cent – its highest rate in at least 60 years.
The upshot of all this is that Khowala thinks the US economy looks promising over the short term, but the full outlook remains unclear. “The trifecta of early reopening, helicopter monetary and fiscal policy has led to an extraordinary boost to consumer demand and recovery,” he said.
He pointed out that some forecasts have real US GDP increasing by more than 20 per cent in the third quarter because of the “unprecedented” policy response.
In terms of how investors should react, the manager said: “The conundrums of electioneering and engineering an economic recovery are creating great uncertainties, and markets are becoming lopsided as investors flock to established winners like tech sector giants and ‘work from home’ stocks, while occasionally trying to punt in extremely beaten down value stocks.
“Valuations of high growth stocks make little sense to me at these levels but they have momentum, while cheap stocks are often cheap for a reason. Against this backdrop, I have stuck with my approach of buying long-term growth stocks that stand to do well in a range of macro scenarios. I’ve also been slowly adding to growth cyclicals, buying on dips, as I feel that the US outlook for the next three years remains strong despite the noise of 2020.”
Within the Fidelity American Growth fund, Khowala looks for companies benefitting from long-term growth trends and have an ability to grow their cash flow. He typically runs a bias towards medium and small-cap companies.
Over the past five years the fund has made a total return of 85.24 per cent, outperforming the FO Equity – USA sector but has lagging behind the S&P 500.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
It has an ongoing charges figure (OCF) of 1.90 per cent and has an FE fundinfo Crown Rating of five.