Blain’s Morning Porridge, Nov 4 2020: Wrong Again Part 1!

“Democracy is the worst form of Government, except for any of the alternatives.” 

The Polls were wrong. Again. The Blue Wave didn’t get up the beach. But Trump hasn’t won either – yet! Whatever he’s claimed, and his threat to ask the Supreme Court to stop the counts, it’s still too early to call the US election. Trump will not go easy.

Just how wrong polls proved to be is shown by the fact Trump won Ohio by 8% when he was predicted to lose to Biden by 4% (according to most polls). Even polls that predicted Trump would win Ohio underestimated the scale of his win. What does that say about next-door states like Michigan, Wisconsin and Minnesota? (As I write Trump looks ahead in all three – although the big Democrat cities have not counted yet. If he loses, he will contest the results.) A number of key battlegrounds won’t declare today.

This looks very likely to get messy. Conceivably, it could come down to Biden winning by one vote in the electoral college, (even if Trump wins Pennsylvania), and that’s a massive risk of destabilisation in terms of how divided the nation will remain. I suspect Pennsylvania will be the key, yet a result could be days away. All of which means days of uncertainty – and a growing sense of unresolved crisis.

The Senate races look to have landed much better than expected for the Republicans. Early showings suggest they could hold 52/53 seats after the counts. If we assume Biden does win then the chances of a gridlocked administration agreeing on hefty stimulus and infrastructure spending could be balanced by tax rises being constrained.

But first…

China Doh Moment….

I’ll come back to the election, but critical market news last night was Chinese regulators cancelling the $37 bln Fintech lender Ant Group IPO. It’s a massive game changer.

The Alibaba spin-out was set to list in Shanghai and Hong Kong tomorrow and had attracted nearly $3 trillion in orders. Yesterday, Jack Ma, Alibaba founder, was called back for “supervisory interviews” following recent criticisms he made about Chinese Banking. In response, the Chinese just changed the regulatory rules that underlay Ant’s success as a lender.

It’s a classic “wake up and smell the tea” moment. China’s swift pandemic recovery and determination to expand made its underweighted stock market look like an unmissable value play as western economies remain riled by Coronavirus.

What the Ant cancelation confirms the Chinese may be Capitalists under a Red Flag, but they won’t abide criticism. They won’t play the conventional rules and expectations about the state remaining outside of markets. Beijing just emphasises it isn’t in the least reluctant to put the state’s interest first – in this case publicly humiliating Ma – to demonstrate markets function on their terms.

It’s a classic moment. Criticise the state and it will crush you. Ma was talking common sense where when he warned about China’s “lack of a financial ecosystem” and a banking “pawn shop mentality” has created lending blocks and a too-big-to-fail culture. When Fintechs like Ant were running rings around the state banks, that also looked like a snub to the state. There also seems to have been an element of Jack Ma getting just a little too popular for Beijing’s comfort level. According to BloombergAnt Group may need to capitalise over 30% if its lending (up from 2%) which is bound to change the businesses fundamentals.

And that’s the rub for all the recent market commentary about shifting asset allocations to China. I’m guilty. I acknowledged there are ESG risks investing in China – but even more fundamental is the basics of investing in firms domiciled where the rule of law, the enforcibility of contracts and the right of clear title are clear and unequivocal. I guess I forgot that fundamental rule. I’d up my position in Alibaba and other China stocks just last week… Doh!

However attractive China may seem.. I’ll be limiting it to 5% of my portfolio.

Meanwhile.. back at the Ranch..

The next few days till all the votes are counted will remain uncertain. I expect the Democrats will be humbled by the scale of poling errors. Trump is proving he is animated, noisy and primed to serve court papers at the merest hint he’s losing. It’s a recipe for conflict and division – so no change there then.

There are number of ways to play this confused and evolving result – I will be back with a Porridge Part 2 later today with more thoughts.

In terms of short-term markets and trying to game the results, I’d reckon the best market response is to either keep you head down till the results are clear, or ride the volatility. We’re seeing moves up and down in Treasuries on the implications for greater or less spending.

However, the long-term is equally important. What will four more years of division, polarisation, and dispute mean for the long-term future of the US in an increasing competitive global market?

I’ll be back with a more in-depth look at the election, consequences and investment strategies once the picture is clearer…

Out of time, and fixated on the result…

Bill Blain

Shard Capital