04 Nov 2020
Ariel Bezalel and Harry Richards
Head of Strategy, Fixed Income and Fund Manager, Fixed Income
Jupiter’s Ariel Bezalel and Harry Richards comment on the implications of the US election for global bond markets.
The result of the US election is still uncertain but the ‘Biden reflation trade’, which had been increasingly priced in by markets, is already starting to unwind as investors reassess risk.
Markets had been set up for a decisive victory for Biden and the Democrats. Many investors had been long commodities, short US dollar, and short US Treasuries in the hope that higher fiscal stimulus under a unified Democratic presidency and Congress would fuel growth and reflation.
But once again it seems that the polls got it wrong, and the market got ahead of itself. A Biden landslide is now out of the question. Trump’s aggressive campaigning certainly seems to have been underestimated by most market commentators. If neither party wins decisively, the prospects of effectively pushing through big fiscal stimulus becomes harder with a divided government and a low majority. At this point, a marginal Biden victory would appear to be the worst outcome for risk assets – even if they see an initial bounce – as it would likely mean protracted delays with pushing through fiscal stimulus alongside higher taxes on corporates and high net worth individuals.
Against this uncertainty, the US dollar has strengthened and US Treasuries have gained. With bond yields getting crushed, markets have fled once again to the high growth potential of the tech sector which is driving equity indices higher.
We expect heightened volatility over the coming weeks. Uncertainty is never good for risk sentiment and in our view the risk that the reflation trade continues to unwind is high. In this environment we expect the US dollar and US Treasuries to continue to strengthen as demand for safe haven investments increase. Considering how close this election is there is also a growing risk that the result is contested. This will undoubtedly add to the volatility. A marginal victory by either party will leave a vast chunk of the US population feeling somewhat disenfranchised leading to further societal problems.
Looking out longer term, regardless of the eventual victor any fiscal stimulus package will likely be subject to delays and obstructions, with a gap between when it is most needed and when the legislation is passed. Moreover, any real economic impact from higher fiscal spending is likely to be short-lived and won’t lead to the reflation story that many are hoping for: the higher the public debt, the less impact government spending has on an economy. Tensions with China seem likely to escalate either way: a resumption of the trade wars under another Trump term can be expected, while Biden appears keener to address human rights issues. Meanwhile, more extreme monetary policy is on the horizon no matter what, further exacerbating deep societal issues such as income inequality and stark political divisions.
Ned Naylor-Leyland
Head of Strategy, Gold and Silver
With no clear winner yet visible and the US public split more than ever, wider markets and gold investors are focused on access to the third person in this drama – Federal Reserve (Fed) Chairman Powell. Markets have remained elevated and real interest rates have remained low due to the implicit open-ended access to the dollar printing press of the Fed. Should there indeed be a contested outcome with litigation and delays, that would infer access to more supportive monetary and fiscal policy could be restricted for a number of months. In my view that has clear negative implications for markets. Gold would likely fall short term if a contested outcome is in play, as the risk is of a spike in real rates and a return to the volatility of earlier this year.
On the other hand, a victory for either Joe Biden or Donald Trump should be good for the price of gold and silver. Both men would authorise a fiscal stimulus package that the country cannot afford, the Fed would be supportive, and real interest rates would likely fall further still.
Brinton Johns
Investor, NZS Capital
The US election result is less important than long-term trends shaping the investment landscape, and innovation and disruption will continue to march forwards.
Jupiter and NZS Capital entered into a strategic partnership in Q1 2020 with Jupiter providing trading, operational and distribution support to NZS.
The US election result is currently unknown; but whichever candidate wins, it will change little in terms of how we invest.
Despite the stark differences between the two candidates, the election does not mark a major fork in the road for the issues that impact our investments. The trends in innovation and disruption will continue to march forward at increasing pace. The gap will continue to widen between companies that can thrive in this environment versus those that languish. The election result will not change these opportunities and vulnerabilities in any meaningful way. We have never believed in owning a ‘red’ or a ‘blue’ portfolio.
Regulation of the technology sector could become a larger issue, whichever way the election goes. If Biden wins, there would be less friction and distraction between the White House and the House of Representatives, which would mean more can change; but we have never seen the trend to tech regulation as having a major party bias. The move to regulate has been underway for some time and will not end soon. Both parties have found reasons to be upset with the tech industry. Republicans have been irked by a perceived liberal bias among social media firms, and Democrats have been critical of tech companies’ power and the potential for customer exploitation.
We therefore expect more regulatory pressure. Increased oversight will be both good and bad for large tech firms, such as Facebook, Google and Twitter. Regulators could push for limits on the expansion of the footprints of these firms. Expect limits on acquisitions in adjacent markets or new growth opportunities, such as Facebook’s acquisition of Instagram several years ago or Google’s purchase of Double Click. Tech firms’ growth could come under pressure. At the same time, new regulations could entrench these companies by increasing the cost and compliance hurdles for new entrants.
China, and in particular its influence on Taiwan and the global supply chain, will remain important, whatever the result of the election. Here the difference between the candidates matters more. Biden would probably be more accommodating on trade and would lessen the pressure of tariffs. A thaw in US-China relations would be positive for the supply chains and cost structures of many firms. On the other hand, Biden seems keener on human right issues within China. It is unlikely that he would initially link trade restrictions to human rights, but the possibility would grow if tensions increase and the world focuses even more intently on alleged abuses.
At the same time, China’s relationship to Taiwan matters. Semiconductors are the picks and axes of the rise of the information age. With 70% of semiconductors passing through Taiwan, either in production or assembly and testing, the sensitivity to China’s actions in Taiwan – and to America’s reaction – is important. Again, Biden, if he becomes president, could end up being tougher on China than Trump, if the focus broadens beyond trade deficits and market access.
Richard Buxton
Head of Strategy, UK Alpha
It has been a rollercoaster night and the result of the US election looks set to remain inconclusive for some time. Whatever the final outcome, there remains potential for the “reflation trade” to gain traction.
It was telling that, in concert with European, Asian and US peers, the UK stock market rallied on Tuesday 3 November, election day itself, retracing just some of the sharp falls that had been seen in previous weeks.
The message was clear: equity markets around the world had determined that the polls were right and were pre-empting a victory for Democrat candidate Biden, as well as a meaningful Democrat majority in the US Senate.
With this, investors could have breathed a sigh of relief that significant financial stimulus would follow, supporting a global economic recovery and the “reflation trade,” boosting the share prices of many of those companies whose fortunes are most closely linked to economic cycles.
So, where does this leave investors?
It may well be that markets will give back some of the gains from recent days until further clarity emerges, although even that is not a foregone conclusion. The biggest concern for markets will be that the scale of fiscal stimulus is likely to be less than many had hoped for.
Any suggestion that the outcome could be contested by either the Trump or Biden campaigns is likely to be viewed dimly by investors, and could give way to a period of renewed volatility in equity and currency markets.
It is important to point out that, at the time of writing, a Biden win is still not “off the cards,” although it seems highly probable that, even if Biden does win the presidency, it will be by a smaller margin than many had forecast.
As such, all eyes will be on the result in the Senate. Should he win the presidency, but the Democrats fail to achieve a majority in the US Senate, there is every chance Biden would become a “lame duck” president from inauguration, with Senate Republicans able to put in place significant barriers to the implementation of his key policies. The lesson from Obama’s loss of Democrat control of the Senate in his first mid-term elections is to go early and fast in the next two years to implement policy change. In such a situation, we can only speculate as to whether Biden would take a leaf out of Trump’s book, relying on executive orders to force through his agenda.
In the longer term, regardless of the eventual outcome, one thing remains clear: isolationism remains a powerful force among the US electorate, and much of Trump’s 2016 agenda still resonates powerfully with voters in a deeply divided nation.
Implications for UK equity investors
The conventional view is that UK PM Boris Johnson is closer to Trump than Biden, who has warned his attitude to a US-UK trade deal rests on no disruption to the Good Friday agreement. But perversely a Biden presidency would have potentially significant implications for the eventual outcome of the end of the transition period following the UK’s official departure from the European Union earlier this year, creating impetus for the UK to pursue a closer economic and trading relationship with the EU than would probably result if Donald Trump does indeed win another term in the White House. Put simply, the pressure on the UK to complete a trade deal with the EU still depends to a large degree on what happens on the other side of the Atlantic.
The UK’s trade ties with Europe remain more important than with the US so a closer relationship with the EU would be welcome news for investors in listed UK companies, who would be able to turn their attentions towards the scale of the “reflation trade,” rather than enduring sleepless nights over ongoing uncertainty surrounding the final shape of Brexit. But the UK may, as the Prime Minister notoriously endorsed as his policy preference, be able to “have its cake and eat it” in the event of a Biden presidency.
A future President Biden could revive US participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership" (CPTPP), and the UK may be able to rebuild ties with the US through also seeking membership – on which it was always keen – simultaneously, obviating the need for a separate trade agreement with the US.
As England enters a second lockdown, the need to support the UK’s recovery will not have been missed by the Bank of England (BoE), either. Regardless of the outcome in the US election, I expect to see a resumption in the Bank’s quantitative easing (QE) programme, starting as soon as this month. This would probably prove supportive for shares in the UK’s commercial banks, for whose profitability further QE would be markedly less detrimental than other stimulatory tools at the BoE’s disposal, not least negative interest rates.
Further QE in the UK, alongside fiscal stimulus in the US would support the “reflation trade” argument. Even in the event of Trump winning a second term, I would expect to see an eventual agreement reached on a significant level of fiscal stimulus, even if smaller than would be the case under Biden. On the possibly heroic assumption that in six or twelve months’ time a combination of better news on a vaccine or mass testing means we can look beyond the coronavirus and lockdowns, the reflationary forces we could reasonably expect to see exerting themselves in both the US and the UK may take the shine off the shares in some of the technology-focused businesses that have been the darlings of the stock market in recent years, as investors increasingly turn their attentions to the potential attractions of “recovery stories” in those stocks that have struggled through the pandemic and Brexit-related uncertainty.
The outperformance of growth stocks over value stocks has not been kind to the UK equity market, with its perceived reliance on value sectors. Even here, there is another potential for a change from a Biden presidency, if that is indeed what transpires.
Biden’s intention to reverse Trump’s hostility to climate change initiatives and to support a green agenda is to be lauded. At present it is European oil majors that have embraced the energy transition and need to change more than their US counterparts. If the US ‘comes into the fold’ under a Biden presidency, this may focus global investors’ attention on the technologies being developed by UK and European energy companies to address climate change. Through recent investments in wind power, biomass, carbon capture and storage, the UK has proved no slouch at developing expertise in an investment trend that is to last for decades.
Markets famously dislike uncertainty. As dawn breaks over Europe and, later, over the United States investors, and the world, will be watching events closely.
Abbie Llewellyn-Waters
Fund Manager, Environment & Sustainability
Abbie Llewellyn-Waters, fund manager, global sustainable equities at Jupiter, reflects on the meaning of the US election and the implications for investors.
In the Jupiter global sustainable equities team, we invest for the long-term, looking beyond the four-year US election cycle. We select companies on a ten year forward basis, and we invest for the planet, people and profit. While the market doesn’t like short term uncertainty, even more important for investors should be aligning their savings to long term structural issues of stakeholder management and economic sustainability.
The credibility of US checks and balances had already seen some erosion by the shotgun appointment of Amy Coney Barrett to the US supreme court immediately prior to the election. It had been further weakened by Trump’s rhetoric casting doubt on a peaceful transition of power. We look to the US to deliver a clear outcome from the extended window.
Having a protracted election is unsettling for markets in the short term. It has the potential to further widen the geopolitical chasm that other nations may seek to bridge. The sanctuary of the US dollar and by extension the US economy could be undermined by protracted uncertainty.
In the Jupiter global sustainable equities team, we invest in resilient businesses with durable franchises that have high recurring revenue streams and strong customer retention rates. We select well capitalised business that are run for the long term and well positioned to weather uncertainty. While current US political instability could create volatility, we look beyond the four-year US election cycle investing in management teams thinking about the next 10 years.
Vincent Che
Fund Manager, Ping An
Vincent Che, Fund Manager, Ping An, comments on what the US election means for Chinese equities.
Merian Global Investors – now part of the Jupiter Group – entered into a strategic partnership with Ping An Asset Management (Hong Kong) in 2018.
The US election outcome is currently too close to call, but regardless of whether it’s a Trump or a Biden win, we believe its longer-term impact on China should be relatively limited compared to that on developed markets. While we do expect the result to impact short-term investor sentiment, we think we are unlikely to see a significant change in terms of pressure on the China-US relationship.
A Trump victory would likely have a more negative impact on sentiment in the short term, but this would be coupled with greater certainty over the longer term, as we already have clearer expectations of Trump’s foreign policy going forward, given the past four years. In contrast, if Biden were to win the election, while we would expect to see more positive short-term sentiment, supported by a large stimulus package, there would be more uncertainty surrounding his foreign policy plans and its resulting impact on China-US relations.
While we always remain mindful of ongoing macro and geopolitical developments, we prefer to focus on the strengths of the domestic Chinese economy. With many other parts of the world still struggling to recover from the impact of the Covid-19 pandemic, or suffering from ‘second waves’, China’s economy saw resilient growth following its success in containing the virus. Demand has recovered, even in the services sector, and domestic consumption and export numbers have been improving too; we expect to see continued strength in China’s economic data. In the face of a challenging external environment, China has unveiled a dual circulation strategy to place greater attention on the internal market, and it also recently announced its five-year economic plan, with a focus on building a ‘technological powerhouse’ and an emphasis shift towards ‘quality growth’; more details on the plan will made available in March 2021.
Talib Sheikh
Head of Strategy, Multi-Asset
Talib Sheikh, Head of Strategy, Multi-Asset, comments on the implications of a too-close-to-call U.S. election, and what the clarity of a Trump or a Biden win might mean.
The result still looks too close to call until Thursday at the very earliest with delayed postal vote counting likely to be important in key states. Futures on the tech-heavy NASDAQ began the day outperforming, and the dollar rallying with bond yields lower. Further volatility looks likely.
A Trump election win would cause some short-term volatility given investor positioning favoured Biden, but a clear resolution to the election is still likely to be positive overall for risk assets as a whole. Negotiations over fiscal stimulus will resume, and we expect these will be resolved favourably with a smaller and more targeted package than would have followed a Biden "blue sweep".
In the case of a Biden victory and Democrats winning the Senate, we would expect to see a very large fiscal package boost markets. The Democrats would be likely to push forward expansionary programmes of infrastructure and public spending. We would expect the dollar to continue its weakening trend, which combined with a less confrontational approach to global trade, would be beneficial for most Asian and emerging market economies and currencies, particularly China and Mexico. A Biden-led divided government would look to pursue similar policies but would be severely handicapped by a Republican senate.
A potential Trump victory would probably bring the continuation of erratic and confrontational foreign policy, particularly towards China and Mexico. This combined with the reduced threat of a weaker dollar would be more negative for emerging market economies and currencies, in Asia and Latin America in particular, than would have been the case under a Biden "blue sweep".
Once, the election is behind us, the threat of a Covid-19 second wave as the northern US heads into winter will take over as the key market worry.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
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