Friday, January 15th, 2021

Three Ideas from the US Senate

There has been no shortage of political news since the New Year, and not all of it is noise. The change of control in the US Senate has lasting importance and there are already three sectors where we can identify an impact: two where something happened and one where it didn’t.

The first sector is Energy, where the Saudis announced a unilateral cut in crude oil production of one million barrels a day effective from February. The reason given was the acceleration in the second wave of Covid, but this doesn’t explain why the Saudi’s wanted to surprise the market. The Russians refused anything more than a token cut arguing that the rise in prices would just suck in more supply from US fracking producers, as has normally been the case.

The Saudi announcement came on January 5th, by which time opinion polls were giving the Democrats a consistent 2-4% point lead in both races for the US Senate in Georgia. Maybe the Saudis would have made the cut anyway, but maybe they took a view that the Democrats would introduce more stringent controls on fracking if they won control of all three branches of the US Government. These would almost certainly reduce the availability of finance to marginal producers. The combination of the production cut and Democrat control is a lot more powerful than either one on its own, which explains the explosive rally in the sector.

Last week also marks the date when Facebook finally lost the argument about content control and censorship and data usage. It’s not just Facebook under the microscope, but the whole of social media industry, including the web services business of Amazon. The Capitol riot is obviously a big part of this story, but the threat of increased regulation – and possibly even the partial break-up of Facebook and Google – would be little more than hot air if the Republicans still controlled the Senate. Our recommended weight for the Communications sector has just hit a two-year low. Worse still, there is on obvious support in the neutral zone. At the current rate of progress, the sector will be downgraded to underweight sometime this quarter.

The third sector is Healthcare and this is the one where nothing happened, which is a surprise. Democrat control of all three branches of government should make it much easier to impose greater price regulation on the big pharmaceutical companies and attempt wider reform of the US Healthcare system. Certainly, the fear of a Blue Wave was one of the reasons given for the underperformance of the sector in the run-up to the main elections. Our rating went from overweight in late June to underweight in mid-November. Yet, in the very week when the Blue Wave finally comes ashore, the Healthcare sector staged its first significant rally in our model since the election.

Maybe this was all fully discounted already, but perhaps there is more interesting explanation. Maybe investors think that the Democrats can take on Big Tech or Big Pharma, but they can’t do both at the same time. They tried and failed with Big Pharma last time round, while Big Tech is now bigger and its abuses are more egregious and more topical. It is too early to argue that the recent support level has definitely held, but we should know in the next month. If it does, we may see Healthcare rally as sharply as it sold off in the second half of 2020.

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