Joe Biden has been here before.
When he became vice-president to Barack Obama in January 2009, the global economy was in a perilous state. Banks around the world were teetering on the brink of insolvency and only government bailouts enabled many to survive. Wall Street giants like Bear Stearns and Lehman Brothers had already gone under. The stock markets were still falling.
The Obama-Biden administration managed to pull the U.S., and the world, out of the financial tailspin, with a huge assist from policies already enacted under outgoing president George W. Bush. In March 2009, less than two months after Obama and Biden were sworn in, the stock markets turned and the longest bull market in history began.
Now the big question is: Can lightning strike twice? Can a Biden presidency turn around the ugly economic scenario we’re facing?
One thing the president-elect has going for him is that the stock market is in much better shape than in January 2009 — at least as things stand right now. After the crash of last March, equities rallied strongly, and some indexes have touched all-time records.
The global economy is still weak, but the news that one or more coronavirus vaccines are likely to be available next year has buoyed investors’ hopes for a rapid recovery. If that happens, we could be in for another long bull market run.
Who would benefit? If the incoming president and his Democratic party have anything to say about it, ESG stocks will be high on the list. (ESG stands for Environmental, Social and Governance.) Most people refer to them as green stocks for simplicity.
Several wealth management companies have embraced the ESG approach to investing. They include Montreal-based Pembroke Management, which offers a portfolio of high-performance mutual funds. One of them is the Pembroke Global Balanced Fund, which posted a 13.2 per cent return over the year to Sept. 30, ranking it third in its category out of more than 1,000 funds, according to Morningstar.
The fund’s co-manager, David Whittall, wrote an analysis of ESG investing for the company’s clients. In it he explained why the climate changes we are seeing offer both danger and opportunity for investors.
“The current trajectory of greenhouse gas emissions is consistent with rising global temperatures and an increase in environmental and social risks from climate change,” he wrote. “Accepting that the disruptions we are experiencing may be trends rather than events, investors should put increasing effort into identifying ESG risks and opportunities and consider their portfolio’s long-term exposure to physical and transition risks.”
Get used to these terms. You’re going to hear them a lot. Physical risk refers to the possibility that a company’s physical assets may lose value due to fires, floods, pandemics or other climate-related causes. Transition risk occurs when laws designed to mitigate physical risk result in regulatory responses that render a company’s assets less valuable — for example, restrictions on coal-fired generating stations or fracking.
Whittall believes the incoming Biden administration will fulfil its campaign promises and promote policy changes that will serve to encourage environmentally friendly businesses. Rejoining the Paris Climate Agreement, which the president-elect has said he will do, will accelerate this process. Participating countries are required to file reports on their progress toward meeting agreed commitments and take remedial action if they are behind schedule.
“I believe all sectors of the economy will benefit, but especially energy and transportation,” he said in a telephone interview.
Among the beneficiaries will be some lesser-known companies that have developed technologies to improve efficiencies in the transportation sector. Two he holds in the portfolio are:
Gentherm Inc. (THRM-Q): This California-based company has developed leading-edge thermal technologies that are used in several sectors, including automotive, medical and electronics. One of its products is designed to increase battery life, maximize charging capacity and reduce a vehicle’s carbon footprint.
Stoneridge Inc. (SRI-N): Michigan-based Stoneridge designs and manufactures highly engineered electrical and electronic components, modules and systems principally for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets. These include sensors and other safety devices that could improve the efficiency of transport fleets.
While it’s too early to identify the companies that will profit most from the green initiatives of a Biden administration, Whittall believes two of the president-elect’s planned initiatives will drive markets higher over the next few years.
The first is an aggressive plan to get control over the coronavirus, which in turn will provide greater certainty for investors. The second is a fiscal stimulus package that will speed economic recovery.
“This is a great time for the U.S. to be focused on these types of policy changes,” he says. “The world, and investors, will benefit.”