The two big question marks currently for share markets are the United States Election next month and how soon a COVID-19 vaccine will arrive.
The Australian market, like it or not, is heavily influenced by the movements in the US, because it's a far bigger pond containing companies with global reach.
Helpfully one fund manager has worked out the likely outcomes for ASX shares in each probable scenario.
T. Rowe Price Group Inc (NASDAQ: TROW) Australian equities head, Randal Jenneke, told investors this week that there were three key situations to consider.
First is a split Congress — this is when the presidency and the senate majority are won by different parties. Second is a 'blue wave', where the Democrats will sweep to power in both. And the third is the arrival of a breakthrough coronavirus vaccine.
Scenario 1: shared power
If a split Congress is seen, Jenneke's bet is on growth shares.
"No one party controls all the arms of government — if that's the case, while we will see greater stimulus… it's going to be lower than it would otherwise be," said Jenneke.
"In that scenario, we think that growth stocks will continue to do well and outperform value stocks."
Scenario 2: blue wave
If the left-leaning Democrats win power in both executive and the legislature, America will become a very different place.
"Here we see the prospect for much bigger fiscal stimulus and spending," Jenneke said.
"In that environment we think that [growth] cyclicals and value stocks will do well."
He explained that while government debt will climb, interest rates would remain low.
Scenario 3: vaccine release
Jenneke thought that the influence of COVID-19 would "fade over time", though a safe vaccine, effective treatments or because society "learns to live with it".
"As the impact fades, we do think that growth is going to improve."
But the importance of a vaccine — or, at the very least, an effective treatment — can't be understated.
Jenneke took the assumptions in the Australian federal budget as an example.
"If you look at the base case for the forecast for FY2021, the budget numbers forecast a GDP growth [of] 4.75%. And that's with an assumption that we have a vaccine by the end of 2021 and it's widely deployed across the Australian economy."
So if a vaccine came a bit earlier than that assumption, it would help growth. If it was later than the government's guess, then it would harm the nation's position.
"This goes to show the importance of what a vaccine means."
How T Rowe Price has balanced ASX shares
Because both scenarios 1 and 2 favour growth stocks, T Rowe Price showed how it has weighted growth subcategories among ASX shares.
Jenneke said that it was currently 38% invested in cyclical growth stocks, 33% in defensive growth, 16% in recovery growth and 9% in extreme growth.
"We think it's really important to hedge your bets a little bit and make sure you're positioned in as many of those 3 key scenarios as you possibly can."
Growth stocks have outperformed value stocks simply because of fundamentals, according to Jenneke.
"A lot of people would highlight the change in multiples caused by low rates, and I'd say, yes, there's been a benefit from that," he said.
"But the fundamentals around sales growth, earnings growth and cash flow growth — this is the key reason."
Despite the bull run before and after the COVID-19 crash, Jenneke said the share market is still an excellent bet compared to other investment options.
"To us, equities still look quite attractive. Valuations don't look stretched. And there's still a good risk premium in the equity market."
