Shares to watch now that borders are reopening and Biden will be president

October is historically one of the most volatile months for markets and indeed this was the case. The calendar quickly turned over to November, historically one of the best months post a U.S election. Naturally, investors are asking, 'what now' and 'what do I need to consider?'

Although we are just two weeks into November, the Australian stock market has already seen its strongest monthly gain since April, with the market up 7% (as at November 10, 2020).

This rally has been supported by three major events - the New South Wales Premier Gladys Berejiklian announcing the state will reopen its border to Victoria; the Reserve Bank of Australia cut interest rates to a brand new record low, near zero, and the US election uncertainty passed. With Joe Biden claiming victory, global markets rallied as they historically do after an election result is known.

Over the next few weeks, markets will be assessing several key things:

1. The reopening of flights between Sydney and Melbourne (the second busiest flight path in the world);
2. Lower for longer interest rates and what this means for markets;
3. China's ban on some Australian commodity imports; and
4. Which stimulus US President-elect Joe Biden will lay out.

Here are some insights to help you identify opportunities.

Energy, and US-exposed stocks in focus after Biden victory  

With Joe Biden defeating Donald Trump in the US presidential race, it may be worth reducing your energy exposure, given Biden has pledged to move the U.S to a 100% clean energy economy with net-zero emissions by 2050.

Next, take a look at companies that are generating US earnings. Biden plans to increase taxes, so there is a risk of earnings per share (EPS) downgrades for companies with U.S revenue. So, consider reducing your exposure to smaller US-income-earning companies and instead look to blue-chip, quality stocks like James Hardie (JHX), Boral (BLD), Brickworks (BKW), Aristocrat (ALL), healthcare stocks CSL (CSL) and ResMed (RMD), and tech stocks Computershare (CPU) and Appen (APX).

Beyond stock specific impacts, the election outcome may be a net positive for markets, for several reasons. Every year after a US election year (over the last 36 years), the Aussie share market has rallied between 6.5% to 40.2% as investors put money to work. Historically U.S shares have also performed better under a Democratic President with a mixed Congress.

At the time of writing, Republicans have more seats in Senate, and Democrats have more seats in House of Representatives. This means there is a higher probability the US-China trade war could be toned down and there's also a chance Biden's tax hikes won't pass though. For this reason, Magellan Financial Group's Chief Investment Officer Hamish Douglass dubbed this mix, a good "check-and-balance", almost a perfect outcome from an investment perspective.

Travel sector worth a look as flights reopen

As the second busiest flight route in the world—Sydney to Melbourne—officially reopens, it is likely that earnings in the travel sector will pick up. A stock to watch is Qantas Airways (QAN), has gained 142% from its March low (as at November 10) and has been gaining momentum. From a technical perspective, its 50-day moving average price, crossed above its 200-day average, a trend that signals further share price growth.

Investment analysts also expect Qantas shares to rally once the airline's earnings pick up. Keep in mind that from 23 November, Qantas's capacity will rise from 30% to 40% of pre-COVID-19 levels. UBS, Morgan Stanley and Macquarie rate Qantas as a Buy with share price targets ranging from $4.90 to $5.25, compared to Friday's close of $4.55.

Another stock that might be worth a look in this space is Flight Centre Travel (FLT). The travel retailer reported rising demand and healthy liquidity, prompting Bell Potter to increase its rating on the stock to Buy to $16.50 a share from $16.00 (compared to Friday's close of $14.01.).

Also check out Alliance Aviation (AQZ), a provider of fly-in-fly-out travel to the mining industry, which is rated by Credit Suisse, Morgans and Ord Minnett as a Buy. The brokers have share price targets ranging from $4.00 to $4.15 on the stock, which closed Friday at $3.41.

Rate cut supports share market growth                                                  

Another big theme to consider is that lower-for-longer rates support share market growth.  After the Reserve Bank of Australia cut the official interest rate to 0.1% and outlined it plans to buy up to $100 billion of government bonds over the next six months, RBA Governor Philip Lowe said the central bank is not expecting to increase the official interest rate for at least three years.

The extremely low rates and the expectation they will stay lower for longer means many investors sitting on the sidelines of the share market, faced with low returns from cash and fixed income, may be forced into equities.

What's interesting is, in all the 17 years where the RBA has cut rates since 1990, 65% of the time, the share market had a positive year. Why? Low interest rates encourage innovation, consumer spending, and business investment, and business take-overs also increase. We have already seen activity in this area, with numerous takeover talks occurring in the last several weeks. All-in-all, lower rates support share market growth, with money managers expecting cyclicals (like banking, mining and industrials stocks) to receive the most investment from here.

Time to rethink China leveraged stocks    

The last theme to be aware of is how diplomatic trade relations have deteriorated with China and Australia and what it could mean for our nation and some listed companies. With the Chinese government allegedly banning $6 billion of Australian commodity imports from last Friday, including coal, copper-ore and concentrate, barley, timber, wine and lobster, it's time to consider your exposure to stocks leveraged to China.

Could milk products be banned next? What about iron ore and lithium? Some analysts think iron ore and lithium bans can't be ruled out, but this is unlikely to happen in the short term as Australia's products are of high quality and it would prove difficult for China to find an alternative and replicate.

For now though, it might be worth considering your exposure to stocks that rely heavily on exports to China. Consider Treasury Wine Estates (TWE), A2 Milk (A2M) and infant formula producer Bubs Australia (BUB) for example.

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