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I’m not about to predict the winner of the upcoming U.S. election after the events of 2016, but there are a lot of portfolio managers who are a lot more brave. Increasingly, institutional investors are preparing for a Joe Biden presidency.

For investors broadly, the importance of the election centres around the potential for fiscal stimulus and corporate tax hikes.

Tobias Levkovich, Citi’s U.S. equity strategist, noted that the potential for a larger stimulus spending package under a Democratic administration is “a theme getting traction among [portfolio manager] clients.” Mr. Biden’s plans include a US$1.3-trillion increase in federally funded infrastructure investment.

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The market sectors that would benefit most from government spending – industrials, materials and banks - are areas where money managers were already ‘intrigued’, according to Mr. Levkovich. The strategist’s conversations with portfolio managers regarding a switch from technology stocks to economically sensitive, cyclical sectors left him with the belief that it’s a matter of “when, not if."

Citi described economically sensitive sectors like industrials and resources (and banks to some extent) as ‘COVID-impaired’ in 2020. The crippling effect of COVID-19 on profits for these sectors makes for extremely easy comparables in 2021. In the second and third quarters of next year, their year-over-year profit growth will easily outdistance companies less affected in most cases, providing business momentum and making them more attractive investments.

Mr. Biden has also proposed an increase in corporate taxes from 21 per cent to 28 per cent. Goldman Sachs strategist David Kostin expects the negative effects of the increase to be felt by the market’s current favourite sectors. In the most recent edition of his Weekly Kickstart report he wrote, “Biden’s proposed plan would have the largest negative earnings impact on popular growth sectors Info Tech, Communication Services, and Health Care."

It is unlikely that any portfolio manager will risk their career by betting heavily on the election results in their funds, but nonetheless there does appear to be a market rotation underway towards cyclicals from technology stocks. Since the start of September, the S&P 500 Industrials index has posted a 1.3 per cent total return, compared with a loss of 3.4 per cent for the S&P 500 and a 7.0 per cent decline for the tech index.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

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Maple Leaf Foods Inc. (MFI-T) The share price of the Canadian food products company has been under pressure in recent weeks, entering correction territory. While the downside risk in the share price may now be limited given the stock’s valuation, investors may need to have patience. The average one-year target price is $35.56, suggesting the share price may rally 35 per cent over the next 12 months. Jennifer Dowty explains why this is a stock to watch. (for subscribers)

Waterloo Brewing Ltd. (WBR-T) Year-to-date, the share price of this brewer is up 20 per cent. The stock has a unanimous buy recommendation from four analysts with an average one-year target price implying the stock price may appreciate 43 per cent over the next 12 months. Trading volume can be low, which can increase price volatility. As Jennifer Dowty explains, this stock is best suited for consideration by investors with a high risk tolerance. (for subscribers)

The Rundown

Wall Street cheerleader Trump has little invested himself

Trump’s relentless cheerleading for the stock market, taking full credit for its gains, has been a hallmark of his presidency, through more than 150 tweets and exuberant rhetoric at his rallies. Yet behind the bluster is a simple fact of which most voters are unaware: Trump barely has any of his own money in the stock market. Deep in The New York Times' recent report on Trump’s tax returns is the fact that he sold more than $200 million in stocks and bonds in the three years leading up to his inauguration. And an Associated Press analysis of his financial disclosures since then shows as much as $8 million more was sold in his first three years in office, even with his investments now in a trust, beyond his direct control. Bernard Condon of The Associated Press examines this paradox. (for everyone)

How investors can profit from one of the most important societal shifts triggered by COVID-19

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Physical distancing is now the rule and working from home has emerged as a secular post-COVID-19 theme. A lot of people don’t seem to want to hear this, notes economist David Rosenberg, but it is true nonetheless. Not everyone prefers to work from home but a whole lot more do, now they have a taste of what it is like not to have to spend money on business attire, or spend two hours every day fighting traffic. He looks at the investments that should do well, and a few that won’t, as society adjusts to this shift in the way that we work. (for subscribers)

Also see: Torn U.S. tech investors debate buy or sell in wake of shakeout

Answering your questions about the new retirement ETF paying 4% income

Despite the simplicity of its purpose, the Vanguard Retirement Income ETF Portfolio is a handful to understand. So it’s no wonder that questions about VRIF have been flowing in ever since Rob Carrick introduced it in a Sept. 15 column. VRIF is the latest iteration of the balanced ETF, a type of exchange-traded fund that bundles a bunch of underlying ETFs into a convenient package that you buy in one transaction. The novel aspect of VRIF is that it’s designed to pay 4 per cent distributions to investors after fees. With five-year Government of Canada bonds yielding 0.35 per cent these days, that’s big. The questions about VRIF reflect a potential customer base that is keenly interested, but appropriately cautious about it as a brand new product. Rob looks at a sampling of the questions - and his answers. (for subscribers)

Are you a worried long-term investor right now? This will soothe your fears

When it comes to investing, it is natural to focus on the short term during periods of uncertainty. A wave of anxiety crashed into the markets in March and another is threatening. But don’t give in to fear. It is better to take a deep breath and pause to consider the long term. Think about the odds that an investment will be profitable over the fullness of time rather than how it will fare over the next few days and weeks. Norman Rothery presents some data that may just have you convinced he’s right. (for subscribers)

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Utilities with renewable energy are a winning combination

Dull utilities with exposure to renewable energy have been a winning combination in the stock market this year – and the long-term outlook is looking bright. David Berman explains (for subscribers)

Pipelines now make up two-thirds of the S&P/TSX energy group

The Canadian energy sector has essentially become the pipeline sector. As Tim Shufelt reports, pipelines have assumed an energy leadership role amid the continuing decimation of the oil patch, which is seeing its size and influence over the Canadian stock market shrink by the day. (for subscribers)

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

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Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Company leaders are trading these four dividend stocks

Tuesday’s Insider Report: CEO of this large-cap dividend stock lands a $923,000 payday

Number Cruncher: Eleven U.S. tech stocks with lofty valuations showing signs of elevated risk

Poll: U.S. dollar’s strength to be short-lived; volatility and weakness ahead

Others (for everyone)

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COVID-19 and deglobalization have created new opportunities in emerging markets

Globe Advisor

Hunt for answer to bond blues turns to active ETFs

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What’s up in the days ahead

Distressed debt investors are ready to pounce. But there’s something holding them back. Tim Shufelt will explain.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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