Market Musings -
Around the World in Three Days: Part One
Travel around the world in just three days to find out from our Co-CIO, Gregory Perdon what the biggest global trends shaping the financial markets are right now. In this short three part Q&A series, read our thoughts on the five economic blocks which matter most for markets (USA, Europe, UK, China and Japan) and what it means for portfolios.
Q: What are you focused on in the US right now?
Our regular readers and listeners will know that our focus is more often on the policies coming out of the Federal Reserve as opposed to the White House, because the Fed and its Chairman, Jay Powell, control the trillion dollar cheque book. What are they up to these days? They are firmly in the realm of the ‘unconventional’ – what do I mean by that? Well, not only are they buying Treasury bonds to keep rates low and ensure ample liquidity in the markets, but they are also buying mortgage-backed securities. By purchasing mortgages in the open market, they are essentially distorting the market by pushing mortgage rates down which can make housing ‘cheaper’ by boosting affordability. Finally, the Fed is engaged in credit easing as they even go so far as to acquire corporate bonds putting the taxpayer on the hook for potential defaults - which is very unconventional indeed!
Q: What about the US election?
With the November 3rd election in near view, the White House is also front of mind because so much is at stake from energy policy, to the environment, to how the US will deal with the tsunami of unemployment resulting from the COVID-19 pandemic –The reality is that if Donald Trump does manage to clinch another election victory, we can probably expect more of what we’ve seen over the past four years. Trump thrives on volatility, tweets his canvas and we can expect additional sabre rattling with the Chinese.
Q: How does this translate into your investment view?
Regardless of the election situation, what is relevant to us as investment managers is how we are taking risk in portfolios and managing those risks carefully. We think it would be a mistake to be too negative (or bearish) on US equities based on a Biden victory. Typically, investment managers’ current thinking is that, if Biden takes the White House, the Democrats will increase taxes, which in turn will reduce corporate earnings and reduce the value of stocks. We think this probably omits the high probability that, if Biden wins, his administration will probably introduce measure to support spending. We mustn’t forget that consumption is king in the USA!
Q: Speaking of Biden, how do you think he might fare over the next month?
In my opinion, Biden faces two mega challenges:
Winning over the swing states – Pennsylvania, Michigan, Florida, Wisconsin, and Arizona (all of which Trump won last time) – and if he does clinch a victory, the rise of the progressive left in his party, which will pose challenges in terms of being able to keep to a centrist agenda.
Q: Continuing our focus on Biden, what do you make of his running mate as a choice of trying to get into the White House? Was Kamala Harris a good choice, yes or no?
Well, there are arguments on both sides. The fact she’s well respected helps the Biden camp. However, the fact that she’s from California (not a swing state) might prove to be a mistake because it won’t help win over one of the key states – only time will tell.
Q: Again, can you tell our readers more about how that affects your investment decisions?
Whether we think one candidate is going to win over another is irrelevant. What’s important is to be careful not taking too much risk skewed to one side or another because, as we have learned over the past few years, the polls can be extremely unreliable.
My personal opinion is that Biden is going to win the election, but that’s not impacting the way I’m managing portfolios. In terms of market reactions to a Biden win, we could see some dollar weakness based on the fact that we will probably see an uptick of government bond issuance with more Democrats in power. We could also see a calming of the political waters with China which could benefit international trade and economies such as Japan. But regardless of the winner, big tech appears to be coming into the firing line – a story which we will be watching very carefully.