Pre-pandemic, vulnerabilities in some EM economies had mounted amid slowing economic growth. As Fig. 1 shows, countries in the bottom right (Brazil, Egypt, Ukraine, South Africa) had limited fiscal space going into the health crisis as they already had high public-debt-to-GDP ratios.
Since the onset of the current crisis we have seen a surge in debt ratios as recession hit. For the moment there is a tolerance in markets towards higher fiscal deficits and public debt (that we closely monitor), but actions to restore fiscal sustainability will be required once the recovery gets underway.
Tracking debt sustainability
Our proprietary ‘Debt Sustainability Score’ looks for a potential negative drift in government indebtedness before it becomes irreversible, using a range of tested inputs. Our ‘Shorter-Term Debt Score’ model detects shorter-term momentum shifts based on quarterly inputs. In fig. 2 below we combine the latest readings of both models.
This chart shows us two things. First it identifies countries with good debt dynamics in the green quadrant: Taiwan particularly and Eastern Europe, especially Bulgaria. Conversely the red quadrant shows us less favourable markets: foremost Brazil (of which more from our EM debt team below), South Africa and Egypt.
Second it flags markets which are seeing short-term shifts that might point to improvements or deteriorations in their longer-term debt sustainability score. Improving on the margin are Chile and Turkey.
Meanwhile a range of markets are seeing short-term deteriorations with possible long-term consequences: foremost the Philippines, but also Malaysia, China and Romania.
A view from our EM Debt Team on Brazil
Brazil has been one of the worst affected countries during the Covid-19 crisis, with a large number of virus cases, significant restrictions and economic disruption.
The fiscal and monetary policy response has been timely and very powerful – involving large social transfers and a significant widening in fiscal balances as well as monetary policy easing and liquidity provision.
The large fiscal impulse in Brazil presented below, during a time of mounting debt to GDP, has unsettled market participants. Very low interest rates have also weighed on the currency, further exacerbated by a difficult environment for EM FX globally.
More recently however, it is becoming clear that the Brazilian real (BRL) has become an increasingly domestic/idiosyncratic story, heavily centered around the outlook for fiscal policy. While we expect the external environment to improve, through a gradual although somewhat uneven global recovery and the prospect of a vaccine in 2021, we believe that BRL will continue to be dominated by domestic fiscal news flow and policy coordination.
The way forward...
In particular, we believe that Brazil needs to set out clear policies for maintaining the fiscal spending ceiling by allowing a gradual expiry of temporary fiscal measures, identifying spending cuts and pushing ahead with a more ambitious reform agenda. Should such a scenario materialize, likely over the next few months, we believe the risk premium specific to Brazil can be priced out from the currency, allowing the BRL to strengthen.
Restoring fiscal credibility in Brazil together with an improving growth/virus picture, strong commodities backdrop and a positive external balance picture should translate into a reversal of this year’s significant underperformance. Of course, if there is evidence that the spending cap is not being respected it could mean further currency weakness, as the debt sustainability issue becomes the dominant driver of Brazilian assets.
By Sabrina Khanniche, Economist in the Fixed Income team, and Mary-Therese Barton, Head of Emerging Market Debt at Pictet Asset Management.
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Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
Pixabay CC0 Public Domain. Tikehau Capital planea lanzar un fondo de descarbonización de private equity centrado en Norteamérica
With President-elect Joe Biden facing a split Congress, investors could welcome the resulting “Biden-lite” agenda, which may include portions of his spending plans -such as fiscal stimulus and infrastructure investment- but little in the way of tax increases.
Biden’s apparent victory in the US presidential election marks an end to months of political uncertainty and turmoil. While both his victory and the outcome of the Senate races have yet to legally finalized, the base case in markets seems to be a Biden presidency and split Congress. This outcome may usher in a more diluted Biden policy agenda.
Indeed, the market narrative seemed to shift in the final days before the election: hopes of a Democratic “blue wave” turned into cheer around “Biden lite”, as Treasury yields declined and equity investors rotated from cyclical value stocks towards opportunities in growth and technology.
More broadly, the financial markets seemed relieved that this major political event was concluding, leading to a wave of risk-on sentiment in the US and globally. With a more incremental approach to policy changes under a Biden administration, we could see markets perform favorably as they benefit from more stable trade relations and better growth prospects heading into 2021. Markets may be buoyed by a return to a more multilateral approach to foreign policy, and the reduced uncertainty that may result.
Perhaps the key concern for markets under a Biden presidency was his proposed USD 4 trillion in tax hikes, including increasing corporate tax rates, capital gains taxes, and personal taxes on wealthy individuals. However, if Congress is divided, most -if not all- of these tax policies will be difficult to enact. And importantly, the Biden team may not view these as a year-one priority, as the pandemic and economic relief take center stage again.
Top priorities of a Biden-Harris administration
As President-elect Biden and Vice-President-elect Kamala Harris consider their key priorities in the weeks ahead, these focus areas could include:
1. Creation of a new pandemic taskforce: As the coronavirus pandemic remains rampant in the US and globally, one of the first priorities will be to address the virus head-on, with support from a new pandemic taskforce of scientists and medical officials. This will set guidelines to stop outbreaks, double down on testing and contact tracing, and invest heavily in vaccine distribution. This will mark a return to “relying on the science” as a fundamental pillar in managing the pandemic.
2. Fiscal stimulus: One area of agreement for both Democrats and Republicans is the need for an additional fiscal stimulus to provide pandemic relief. Thus far, Congress has issued nearly USD 3 trillion in stimulus, and Democrats and Republicans have proposed competing packages for a next round of stimulus of USD 2.2 trillion and USD 500 billion respectively. Both packages cover unemployment benefits, small business relief, and another round of stimulus cheques to households. We could certainly see stimulus passed early in the next presidential term, which is likely positive for risk assets.
3. More executive orders on climate and clean energy: Biden’s plan includes a USD 2 trillion investment in areas of clean energy, including wind, solar and renewable energy. While this policy would likely face opposition in a split Congress, we may still see a Biden presidency seek to push forward his climate and sustainability agenda via executive order, and he may appoint more “environmentally friendly” leaders to his cabinet. Overall, we could see new opportunities for sustainable investing. Some actions that he could take without the support of Congress may include rejoining the global Paris climate accord, reversing some of Trump’s executive orders on energy or signing executive orders to cut emissions.
4. Infrastructure investment: Another area where both Democrats and Republicans may ultimately agree is infrastructure investment. Both Biden and Trump have talked about investing in traditional infrastructure -such as the rebuilding of roads, bridges and airports- as well as technology like 5G and artificial intelligence. While the Biden team proposed a USD 1.3 trillion infrastructure package, we may ultimately see a smaller package approved by both sides, perhaps in the USD 750 billion range. This would nonetheless represent an important investment in US economic growth and potential jobs. It could also stimulate opportunities in the private markets space to help finance these critical projects.
5. Returning the US to the world stage: In addition to rejoining the Paris climate accord, Biden has also talked about restoring US membership in the World Health Organization (WHO), as well as repealing via executive order the travel ban on majority Muslim countries. Overall, a Biden administration would favor the US returning to the world stage as an ally and leader, aligning itself once again with its historical allies and perhaps coordinating globally on climate solutions. In terms of US-China relations, while Biden has pledged to be “tough on China”, he has indicated he prefers a less unilateral approach than his predecessor and plans to bring US allies, labour groups and environmental organisations to the negotiating table.
Reaching across the aisle
With a focus on reconciliation, a Biden administration may “reach across the aisle” for Cabinet and key position appointments. Indeed, there has been speculation that Biden may maintain Trump appointee Jerome Powell as chairman of the Federal Reserve and consider Republican senator Mitt Romney for the position of US Treasury secretary. Markets may welcome this balanced approach to governing, particularly in key roles impacting financial policy.
Markets like evolution, not revolution
Overall, the theme of a Biden victory and split Congress seems to be evolution rather than revolution -perhaps what voters and investors welcome most when it comes to government policy-. This outcome also lessens the probability of unintended consequences that we may have seen from a “blue wave”, such as rapidly rising interest rates which could be disruptive to markets. Also note that, historically, investors have seen seasonally stronger market returns from election day through year-end.
Implications for investors
Against this backdrop, we could see a broadening of participation across asset classes, with cyclical parts of the market performing alongside growth technology, and non-US markets playing catch-up, especially given more congenial global relationships and perhaps an ongoing softer US dollar. Notably, China and north Asia could benefit most from a thawing of tension, alongside better virus outcomes in that region overall.
In credit markets, with yields expected to remain stable and low, we would continue to see investors “hunt for income”. Our preferred credit risk includes parts of selecthigh-yield assets (including “fallen angel” strategies), convertible bonds (which can participate in equity upside as well) and curve-steepened strategies that benefit from better growth and inflation potential.
Finally, we see potential areas of opportunity outside of traditional value/growth strategies, including infrastructure, clean energy, US housing, and technology infrastructure like 5G, all of which could thrive in a post-election environment.
A column by Mona Mahajan, US Investment Strategist in Allianz Global Investors
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My position on the creation of Registers in the British Virgin Islands (BVI) is well known and, in this commentary, I will fully explain my reasons to reject this potentially very harmful (and unnecessary) initiative.
In my opinion, there are at four relevant arguments worth exploring as they put my stance on the right side of history. There are none, as far as I can see, for the opposing view.
Privacy
When the Income Tax was first created, with the main aim of covering extraordinary expenses (like wars), the current arguments used by detractors against taxes were not why private individuals had to pay for crises they had not created, or even why the Government thought that it was appropriate to “rob” citizens in order to do so, but what many among us still see and defend as something fundamental in these times: the individual’s right to privacy.
Mid-19th century taxpayers thought the Government had no right whatsoever to know how much money they earned. They were already paying consumption taxes and they were not willing to let the Government meddle with their private lives.
Income Taxes evolved over time: one war led to another, and even in the absence of armed conflict, inefficient governments decided to impose them without any extraordinary circumstances. And so, more and more countries started to adopt them.
As a result, individuals started to seek ways to avoid these taxes lawfully, often by using structures in jurisdictions where this type of tax was considered akin to expropriation. They also created juridical structures aiming to protect their privacy. There is nothing to condemn in either behavior and BVI, alongside other jurisdictions that have created a framework for these business opportunities, has played a crucial role in this industry, providing the best context for these individuals to achieve their wealth planning goals.
Let us add that offshore jurisdictions were not created to capture investments by other countries’ fiscal residents, but it was the latter that drove away their own citizens by overlaying exorbitant taxes (on their income first and then on their assets) leading to an unsustainable amount of fiscal pressure. Then, continued intrusion into individual freedoms reached levels considered too high by those individuals who think privacy is an unalienable right.
The solution to this tension is not that complicated at law: When two different, individual rights oppose each other, the arising conflict is always resolved by determining which right prevails in hierarchy. When there is a “conflict” between a fundamental human right and a mere interest of the State, there can be no discussion.
Personal safety
This section would not be relevant if the entire world enjoyed the levels of legal certainty and personal security of the U.S. or Europe. This is not the case. And the vast majority of BVI users live in insecure countries, most of them in Latin America, Asia and Africa, where unfortunately violence is already part of their day to day lives.
For these individuals, the critical need for privacy that was discussed above is also relevant for other reasons. In fact, these individuals are people who live in countries where the need to protect wealth does not have anything to do with the desire to pay less taxes or the right to privacy as a right in itself (which would, of course, be understandable), but to protect their physical security. In Latin America, for example, crime levels are extremely high and that includes kidnap for extortion of high-income citizens, theft, torture and murder. What is the use of privacy then? To protect assets, of course, but also to protect life itself.
Forty-two of the 50 most violent cities in the world in 2020 are in Latin America, most of them in Mexico and Brazil. Out of the remaining 8, Durban and Mandela Bay in South Africa, and Kingston, Jamaica, stand out. Only two are in developed countries: St. Louis and Baltimore. As for the countries with the most extortion kidnappings, Brazil tops the list with 54.91% of incidents, followed by Mexico with 23.40%.
The BVI SOLUTION already exists
In BVI, there is an established system that allows authorities to know the identity of the shareholders and owners of the companies established in the territory in a matter of hours if necessary: the notorious BOSS, copied and implemented by many competing jurisdictions.
We do not deny, that under certain circumstances, this information must be provided to the authorities. Unlike those who criticize our position with regards to implementing this new BO Register, we put ourselves in their shoes and we tell them that they are right in their aims, but not in their arguments or, even less, their proposals.
In other words, the interests that this new Register is intended to protect are appropriately protected already. There is no need for further infrastructure: why would we reinvent a wheel that is not broken?
Economic arguments
If the world ever adopts this idea holistically, the offshore industry will be effectively cancelled. This would be a death knell for BVI, other offshore jurisdictions and the individuals using them with strictly lawful goals.
But why get ahead of ourselves and give away our lifeblood on a silver platter to other jurisdictions when the existence of public registries of UBOs is far from being a world standard nowadays? This would be one of the most detrimental political decisions the jurisdiction could make as it will lead to loss of business and the migration of trust and wealth planning companies out of BVI.
My fear would be that companies doing business in the BVI would be forced to move their operations and clients to jurisdictions which will not have these registers in place, such as Belize or Nevis, in order to maintain some sense of privacy for their clients. We would also face scrutiny from HNW and UHNW advisors and clients in emerging markets with regards to them having to place themselves and their clients in harm’s way in order to comply with this Register. This is simply not good for business.
Means and ends
Again, it is clear that governments have a legitimate interest in knowing the wealth status of their taxpayers, but as I always say: sometimes, the cure can be worse than the disease. What is the cost? Is this worth it if there are other, less invasive, mechanisms that lead to the same result? Do we need to lose all aspects of privacy to conform to what a few people think is the solution?
Column by Martin Litwak,lawyer specialised in international wealth management and investment fund structuring
The global economy is recovering from the effects of the pandemic and corporate earnings are picking up, thanks in part to generous monetary and fiscal stimulus. Interest rates remain at low levels, and are expected to remain so for the long haul. History shows this is the kind of environment in which speculative grade credit does well.
The combination of improving economic and corporate earnings prospects and low debt servicing costs reduces the risk of default. Which means that high yield should continue to be one of the very few areas of the fixed income market where investors can still pick up a positive real return.
The economic picture is more encouraging than it has been for months. This follows a weak second quarter, when leverage among European high yield companies hit a multi-year high of 4.8 times, EBITDA dropped 47 per cent year-on-year and debt rose by 23 per cent (see Fig. 1). Recent data indicate that activity in Europe is now back to around 80 per cent of pre-Covid levels. Demand for cars, a leading indicator of economic growth, has bounced back to just 20 per cent below its six-year trends vs 80 per cent in the spring. We are therefore confident of seeing further positive surprises – both in macro-economic data and corporate earnings in the coming months. This has yet to be reflected by financial markets.
Prospects for speculative-grade companies look better still once fiscal and monetary policy are taken into account. The European credit market has benefited from unprecedent interventions from central banks and governments, which have stepped in speedily to protect viable businesses and limit the number of corporate defaults. The scale and speed of such interventions – which has included programmes such as furlough schemes and government guaranteed loans – have been impressive.
For their part, companies have strengthened their liquidity positions and balance sheets, by drawing on their credit lines, issuing new debt, cutting costs and reducing capital expenditure. The cash to debt ratio among speculative-grade companies in Europe has as a result risen from 10 per cent a year ago to 19 per cent in June 2020 (1).
Obviously not every company will come through this crisis unscathed – but the impact is likely to be less than originally expected. In March 2020, Moody’s central scenario assumed default rates of 7-8 per cent default rates for high-yield issuers. Since then, however, conditions have improved, prompting Moody’s to cut its default rate forecast to 4.9 per cent in August. There is a strong chance that defaults have peaked. Corporate Europe is in stronger health.
The opportunity set
Some investment opportunities are more attractive than others.
Bonds issued by French and German companies, for example. Among major developed nations, France and Germany led the way in terms of support for businesses with packages worth EUR 16.2 and EUR 14.3 billion respectively – more than double that of third-placed Italy (2).
The pandemic has also deepened the pool of attractive high-yield bonds. The economic fallout from Covid-19 has caused a spike in the number of fallen angels, companies that have just lost their investment grade status. In the first eight months of 2020, Europe saw some EUR 45 billion of fallen angels and that amount can be expected to nearly double by year-end (3). This creates a long term opportunity as many of these firms are strong, resilient businesses. The addition of fallen angels increases the size and improves the quality of the high yield market – augmenting an already large cohort of BB-rated companies.
This year’s pandemic shock has been different from the 2008 financial crisis as far as its impact on individual industries is concerned. In 2008-9, financials were the hardest hit; industrial companies also suffered as is common during recessions. This time, however, many factories were able to continue operating partly thanks to increased automation. Chemical and shipping companies fared much better in this crisis than in 2008-9. Instead, the economic impact was most felt by the services sector. Market pricing has yet to reflect this resilience in our view.
Elsewhere, in some of the hardest hit sectors like travel and retail, there is a tendency for all companies to get tarnished with the same brush despite possessing very different financial profiles. An online travel agency with limited fixed costs, for example, is in a far stronger position than a car rental operator. DIY shops have also held up relatively well as families spent more time at home and decided to improved their dwellings. Retailers with e-commerce operations have also proved resilient while those who rely on physical outlets have suffered.
Consequently, retail focussed real estate investment trusts (REITs) are among the worst hit, while residential REITs fared much better. The sports ban and closure of gaming avenues has benefited gaming companies with online presence.
With central bank and governments both focused on providing financial support that extends out by months rather than decades, shorter dated credit is particularly appealing. The high yield curve is nearly flat. For instance, Teva Pharmaceutical Industries’ 2027 bond is currently trading only 42bps wider that its 2023 bond (see Fig. 2). By investing in shorter maturities investors thus get similar return while taking on less duration risk (4).
We believe the flat curve reflects doubts about the sustainability of the economic recovery and corporate prospects. If such concerns turn out to be misplaced, the curve will likely revert to its usual upward-sloping shape, creating an additional source of return for short-term bonds.
Overall, then, the spread offered by short-term high yield bonds provides more than adequate compensation against the risk of default. We expect European short-term high yield credit will generate positive returns of 3-5 per cent in the next 12 months. As compared to other alternatives within fixed income, this is an opportunity not to shrink away from.
Opinion written by Prashant Agarwal,Senior Investment Manager specializing in High Yield in the Fixed Income team at Pictet Asset Management.
Notes:
(1) Morgan Stanley
(2) Deutsche Bank Research, “State-Aid Loans to High Yield Issuers”
(3) JP Morgan
(4) Duration measures how sensitive a bond’s price is to changes in interest rates.
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Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc is registered as Portfolio Managerr authorized to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
The coronavirus pandemic has provided the world with its toughest stress test in more than 80 years. It has given rise to complex moral choices – not only for governments and businesses but also communities and families. Such has been the upheaval caused by Covid-19 that it is difficult to envisage a return to the life we knew before the virus struck.
Indeed, the history of pandemics shows that public health crises are profoundly disruptive. Their economic, societal and geo-political effects are often long-lasting, unfolding over many years. At Pictet Asset Management, we have conducted a study in partnership with the Copenhagen Institute for Futures Studies to better understand how the investment landscape might evolve in the next five to 10 years. The research presents investors with four scenarios that might plausibly unfold in the wake of the coronavirus pandemic.
We hope that these scenarios would serve as a starting point for long-term planning and strategic asset allocation. Our aim is to ensure investors are asking the right questions.
Scenario A – Act local, think global: Citizens emerge from the public health crisis with a new moral purpose, having come to accept that that inequality and environmental degradation can only be reversed through collective action. What is the impact of global productivity and trade?
Scenario B – All together now:The world transitions from a largely unipolar world directed by the US into a multi-polar one in which nation states and international organisations collaborate. Discover which investment trends could be on the rise.
Scenario C – Not my problem: Citizens prioritise their own livelihoods and financial security and disengage from political discourse and community life. Governments struggle to transition to a more inclusive economy. What course could this take?
Scenario D – Going it alone: Nation states turn inwards in an effort to safeguard their own natural resources, industries and workers. What is the impact on global problems such as environmental degradation and social inequality?
Each scenario has its own distinct economic, societal and geopolitical landscape. And each has its own set of implications for investors – industries that thrive in certain conditions might struggle for their very survival in others.
Tribune written by Steve Freedman, Senior Product Specialist at Pictet Asset Management.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
Important notes
This material is for distribution to professional investors only. However it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. Information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Any opinion, estimate or forecast may be changed at any time without prior warning. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
This document has been issued in Switzerland by Pictet Asset Management SA and in the rest of the world by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
Pixabay CC0 Public Domain. La relación entre el Reino Unido y la UE después de diciembre y las implicaciones para sus respectivas industrias de fondos
With less than 100 days until the UK definitely leaves the European Union, it is worth reflecting on the practical impact of Brexit on the relationship between the UK and Luxembourg in the asset management and fund industry.
London and Luxembourg are long-standing partners. With 17.1% of AUM, UK asset managers represent the second largest group of initiators of Luxembourg funds. These investment funds (UCITS and AIFs) benefit from European marketing passports. They are distributed in the EU at large, including the UK, and beyond.
The UK is in fact a very important distribution market, with Luxembourg clearly a leader among overseas funds. Roughly 25% of funds distributed in the UK are overseas funds. As at 31 December 2019, there were 8,862 funds/sub-funds distributed in the UK. From this total, 4,341 are Luxembourg-domiciled, which thus represents 49% of all overseas funds registered in the UK.
The vast majority of UK asset managers (HSBC, Invesco, Schroders, Aberdeen, M&G, just to name a few) have established their own UCITS management company or AIFM in Luxembourg. This was already the case before Brexit, but some additional 30 firms have in the meantime set up their own operation in Luxembourg. This allows them to benefit from the European management passport once the UK will have left the EU. This was a logical move when considering that the UCITS Directive and AIFMD feature both a “product” passport, meaning the investment funds themselves, and a “management” passport for UCITS management companies and AIFMs managing these funds.
Another possible way of retaining access to distribution in the EU is to set up the fund in Luxembourg while appointing a third-party management company, should the UK asset manager not have its own operation in the EU.
By far and large, ALFI’s feedback from its members is that virtually all firms have taken the necessary steps to anticipate a hard Brexit: either setting up presence for those few that needed a presence in the EU as just mentioned, or re-domiciling UK funds to Luxembourg, and making the necessary adjustments in the allocation of assets.
Unlike in other segments of the financial sector such as the clearing of derivatives, trading venues or CSDs, the concept of equivalence plays little if no role when it comes to the management and marketing of EU and non-EU funds. Indeed, the UCITS directive and the AIFMD already offered pre-Brexit a relatively clear framework.
The impact on UK and Luxembourg
What does this mean in practice for UK funds? Any fund that is not a UCITS is by definition and from a European perspective an AIF. Those UK-domiciled UCITS will lose their UCITS label. They will qualify as non-EU AIFs as from 1 January 2021. They may still be marketed to European investors subject to the conditions set out in the AIFMD, which are obviously more restrictive. Non-EU AIFs can indeed only be placed subject to the terms of the National Private Placement Regimes, if any, of each individual EU Member State. They will no longer benefit from a marketing passport as the AIFMD 3rd country passport has not been activated.
And for Luxembourg? Any Luxembourg UCITS that is today marketed in the UK will similarly no longer be viewed by the UK as a UCITS from 2021 onwards. That said, there is wide consensus among policymakers and asset managers that it is key, from an investor choice’s perspective, to keep the UK market open to overseas funds, especially when considering that UCITS are retail products with a high degree of investor protection. Today, most money market funds and ETFs marketed in the UK are overseas funds, almost invariably domiciled in Luxembourg or Dublin.
To avoid any disruption, the UK government and the FCA implemented a Temporary Permissions Regime (TPR) which enables relevant firms and funds which passport into the UK, to continue operating in the UK when the passporting regime ceases to exist on 31 December 2020. All Luxembourg investment funds registered for distribution have made use of the TPR mechanism.
The TPR is obviously a short-term facility to bridge the gap until new legislation is passed and effectively implemented in the UK. It is expected that this will take two or three more years from now.
2021 and beyond
From January 2021 onwards, the UK will become a 3rd country. The legislator may impose additional requirements on overseas funds like this is currently the case with EU funds distributed in other 3rd countries such as Switzerland, Hong Kong etc.
The UK Government (HM Treasury) launched a Public Consultation on the Overseas Funds Regime (OFR) post Brexit, to which ALFI responded in early May. ALFI generally agrees on the approach taken, in particular the concepts of outcomes-based equivalence set out in this Consultation. The main challenge for overseas funds will obviously lie in the additional requirements (such as the requirement to comply with FCA PS18/8 on the Assessment of Value) that the UK legislator, being no longer bound by EU legislation, may impose on overseas funds. It may trigger additional costs hence each overseas fund will need to weigh the costs and benefit of continuing marketing in the UK.
Delegating management
A major point of attention in the relationship between the UK and the EU post Brexit is the delegation of portfolio management. Delegation is explicitly permitted in the UCITS Directive and AIFMD. Cooperation agreements between EU Member States and third countries must be in place in case of delegation, which will be the case.
The designation of delegates in and outside the EU is subject to strict requirements of initial and ongoing due diligence, and oversight of delegates. A framework with the required protections and safeguards is already in place. As a result, there is a wide consensus in the industry that they are no reasonable grounds to revisit the delegation framework in the context of the reviews of the AIFMD and UCITS Directive.
Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.. Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.
Two powerful forces have shaped the global equity landscape in recent years – passive investing and private equity (PE). A broad range of investors have turned to index-tracking funds for low-cost exposure to the broader market. Meanwhile, a somewhat smaller but growing group have gravitated towards PE, attracted to its potentially higher returns and diversification benefits.
The growth of passive and private investment has been such that, together, the assets under management of the ‘two Ps’ have quadrupled over the past decade to some USD 12 trillion, overtaking the traditional active equity market (at USD 11 trillion).
In our view, passive and private investing might take different paths over the next five years.
When it comes to passive funds, their best days may now be behind them. Investors and regulators are becoming increasingly aware of – and concerned by – the risks that come with the expansion of index trackers. Research shows passive investing poses threats to market stability and sustainable investing.
The prospects for PE look brighter, though whether it can continue to grow its share of the pie is contingent on it becoming more widely accessible and less opaque.
Investors have gravitated towards PE, attracted to its potentially higher returns and diversification benefits
Historically, PE has been considered too much of a risk for all but the most experienced, professional investors. But that is no longer the case. One reason is the sheer size of the market. Because private equity-owned companies are proliferating while the number of listed firms is falling, the arguments for opening up PE to individual investors have become too loud to ignore. This speaks to the democratisation of finance.
That is not to say passive investment will go into reverse, just that the pace of expansion may slow as investors and regulators discover that passive strategies, while cheap and easy to access, are far from risk free.
Re-pricing risks and benefits
While passive’s low fees might look attractive in an era of post-pandemic belt tightening, that comes at a price: index trackers follow the entire market, rather than picking the best bits at any one time. That is a problem because the mispricing that has occurred during recent bouts of volatility has created fertile ground for stock pickers. The gap between winning and losing stocks will only widen as companies that embrace innovation and technology thrive and the strength of balance sheets becomes ever more important.
More generally, the rise of passive investing threatens efficient market pricing. The stock market relies on active investors to determine an equilibrium value. Yet under index-tracking, the shares of companies with large weightings attract more capital irrespective of their financial performance. So, if the system is dominated by passive investing, the price of a security ceases to function as a gauge of a firm’s underlying prospects, leading to capital misallocation. Potentially making matters worse is the concentration of the passive market. There are growing concerns that as index-tracker funds continue to accumulate assets, the lion’s share of that money will flow to the three large asset managers that control the passive industry. Already, the big three passive fund houses collectively own more than 20 per cent of US large-cap stocks; they also hold 80 per cent of all indexed money. Should those proportions continue to rise, the resulting concentration of shareholdings – known as common ownership – could reduce competition and threaten the efficient functioning of markets. There is a growing body of research attesting to these negative effects. A 2018 study (1), for instance, found that when big institutional investors were large shareholders in firms producing both brand-name and generic drugs, the generic manufacturers were less likely to produce non-branded versions. This increased prices for consumers. Similar trends have been documented in other industries where common ownership is high, such as airlines and the banking sector. This is causing alarm among regulators in Europe and the US – the Federal Trade Commission and the US Securities and Exchange Commission have both said they are monitoring developments closely.
Passive investing does not necessarily aid the development of responsible capitalism, either. Passive funds, by their nature, do not choose the companies they invest in. That reduces the potential for investors to engage with the companies and to encourage them to embrace responsible and sustainable business models aligned to environmental, social and governance (ESG) principles. Passive portfolios tend to invest in so many companies as to make direct engagement with them impractical, and the small share of each holding within the portfolio reduces the incentive on an individual company basis.
Private equity, of course, is also far from risk free, but we would argue that many of its issues may be better understood and reflected in pricing.
First, there is the problem of transparency. PE has a patchy track record on ESG, for instance, and the requirements for transparency and disclosure for privately held firms are far less stringent even if a few are now trying to change that.
Then, there is debt. PE also has high leverage (just under 80 per cent of buyout deals in 2019 were carried out at over six times EBITDA relative to roughly 60 per cent at the prior peak by this measure in 2007) (2). PE investments are also primarily in small and mid-sized firms, whose business models are less well established. These factors could weigh on PE returns in a period of pandemic-induced economic weakness. Furthermore, PE-owned businesses are excluded from some government bailout schemes, while those that are available tend to come with complex conditions that may relegate them to a last resort.
In the longer term, though, the PE sector can help to finance businesses in a period when public markets may be less open. We may see more public companies taken private, as well as PE funds gaining minority stakes in listed companies, with an eye to increasing these later.
Dry powder
Crucially, PE has plenty of dry powder, some USD1.46 trillion according to latest available data (3). That can be used to shore up balance sheets and, later, to make new investments, supplemented by additional money that major investors have signalled they would like to allocate to PE. (The reported gap between actual and intentioned allocations stands at over 2 per cent of private sector pension funds’ total assets) (4).
A potential game changer will be the drive to democratise finance. Historically, PE has been the preserve of institutions and the ultra-wealthy – a disparity that regulators are now looking to fix by opening up the market to individual investors. The US has led the way, laying the foundations for ordinary savers to invest in PE funds through employer-sponsored 401(k) retirement accounts, which analysts forecast could bring in USD400 billion of fresh cash (5). The US Labor Department, meanwhile, sanctions the use of PE in professionally managed multi-asset-class investment vehicles, such as target-date, target-risk, or balanced funds. Other countries, including the UK, are considering similar moves.
Potential attractions for current and future PE investors include diversification benefits and a broader opportunity set – not because PE companies are somehow inherently better, but because they tend to have different characteristics to listed equities.
For a start, they are younger. The median age of a company going public in the US has risen from an average of seven years in the 1980s to 11 years between 2010 and 2018. The private market also includes a large number of small but rapidly growing companies with significant intangible assets. Typically such firms do not want to disclose their early stage research publicly and therefore favour a closed group of shareholders. What is more, in the US at least, the pool of private investments is deepening. Private companies are proliferating while listed ones are in decline. Since 2000, the number of listed companies has fallen to 4,000 from 7,000.
PE also offers the possibility of benefiting from operational improvements in the way businesses are run. When executed well, this can lead to impressive returns.
However, choosing the right PE investments is far from straightforward. The fees are relatively high and investment structures are complex. Moreover the sector lacks transparency, so opening it up to less experienced individual investors (such as 401(K) holders) presents challenges for regulators. Indeed, the US Security and Exchange Commission has recently rebuked PE and hedge fund managers for charging excessive fees and appearing to favour some clients over others (6). There are calls for reform of the fee structure to make the industry more sustainable, and a few firms have already started to move in that direction (7).
Due diligence is much more important in PE than in public markets
Due diligence is much more important in PE than in public markets. According to our research, in 2018 the difference in performance between the 5th and 95th best-performing funds was 60 per cent in the US PE universe, versus just 8.5 per cent for US small/mid-cap equity funds. Studies also suggest the high persistence of manager returns, which was a feature of private equity – has declined, meaning yesterday’s winners are now less likely to top the tables tomorrow.
Due diligence is paramount: there are some signs in the US that, in aggregate, the returns gap between listed and private equity is starting to narrow. Indeed, over the next five years, we forecast global private equity returns of 10.3 per cent per annum in dollar terms, which represents a premium of just 2.8 percentage points over public equities, almost half its long-term historical average. That’s partly because of the sheer weight of capital chasing potential opportunities. Of course, the high dispersion means that some will do much better while others fare much worse. And, at a time when bond yields are very low, even a lower-than-average excess return may be attractive to many.
PE has the potential to continue to capture an ever-growing share of the equity market – as long as it succeeds in opening up to a wider range of investors and proves its potential to add value. Passive equity has already shown what can be achieved with a democratic approach and will continue to do well, but, having grown faster and for longer and attracting greater scrutiny from regulators, it may now be nearer its natural plateau as a proportion of equity AUM.
Column written by Supriya Menon, Senior Multi-Asset Strategist at Pictet Asset Management.
For more information on Pictet AM’s Secular Outlook report, detailing key market trends and investment insights for the next five years, please download here
Notes:
[1] ‘Common Ownership and Market Entry: Evidence from the pharmaceutical industry, Newham, M., Seldeslachts, J.,Banal Estanol, A., 2018 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3194394
[2] Bain Private Equity Report 2020
[3] Preqin, as of June 2019
[4] McKinsey Global Institute, “A new decade for private markets”
[5] Evercore
[6] SEC, June 2020
[7] “An inconvenient fact: private equity returns & the billionaire factory”, L. Phalippou, 2020
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented herein.
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US equities were lower during the month of September, ending a streak of five consecutive months of gains. Investors sold shares as a reaction to the news of a resurgence of coronavirus cases in Europe. The “Big 5” tech companies as well as other growth/momentum stocks contributed to the weakness for US equities over concerns of crowded positioning and stretched valuations.
Fears are intensifying over a resurgence of COVID-19 from students going back to school, colder weather and the start of influenza season. However, increased optimism about the progress of a vaccine and treatment trials have investors hopeful that the economy will not endure another global shutdown.
While dialogue has remained open for a bipartisan deal for additional coronavirus stimulus, political tensions have made negotiations difficult and unclear. The upcoming presidential election has added more volatility to the markets as well as the political uncertainty associated with a potential delay of declaring a winner due to mail-in ballots and likely litigation.
While technology stocks have been the primary beneficiaries during COVID-19, other areas of the economy (including housing, retail consumer spending, business capital expenditures, and government-backed infrastructure related spending) will likely lead in a recovery. As stock pickers, we can use the current volatility as an opportunity to buy attractive companies, which have positive free cash flows, healthy balance sheets and are trading at discounted prices.
Merger activity in the third quarter topped $1 trillion, an increase of 94% compared to the second quarter and the strongest quarter for dealmaking since the second quarter of 2018. Worldwide M&A now totals $2.3 trillion year-to-date, a decrease of 18% from 2019 levels. Technology, Financials and Energy & Power were the most active sectors accounting for 43% of all dealmaking. Europe and Asia Pacific have remained bright spots for M&A, increasing 15% and 19% respectively, while dealmaking in the U.S. has declined in 2020 by 42% to $815 billion. Global deals valued between $5 and $10 billion have increased 23% over 2019, while mega deals (deals valued over $10 billion) have declined 33%.
Column by Gabelli Funds, written by Michael Gabelli
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GAMCO Merger Arbitrage UCITS Fund, launched in October 2011, is an open-end fund incorporated in Luxembourg and compliant with UCITS regulation. The team, dedicated strategy, and record dates back to 1985. The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily in announced equity merger and acquisition transactions while maintaining a diversified portfolio. The Fund utilizes a highly specialized investment approach designed principally to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganizations. Analyzes and continuously monitors each pending transaction for potential risk, including: regulatory, terms, financing, and shareholder approval.
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GAMCO is an active, bottom-up, value investor, and seeks to achieve real capital appreciation (relative to inflation) over the long term regardless of market cycles. Our value-oriented stock selection process is based on the fundamental investment principles first articulated in 1934 by Graham and Dodd, the founders of modern security analysis, and further augmented by Mario Gabelli in 1977 with his introduction of the concepts of Private Market Value (PMV) with a Catalyst™ into equity analysis. PMV with a Catalyst™ is our unique research methodology that focuses on individual stock selection by identifying firms selling below intrinsic value with a reasonable probability of realizing their PMV’s which we define as the price a strategic or financial acquirer would be willing to pay for the entire enterprise. The fundamental valuation factors utilized to evaluate securities prior to inclusion/exclusion into the portfolio, our research driven approach views fundamental analysis as a three pronged approach: free cash flow (earnings before, interest, taxes, depreciation and amortization, or EBITDA, minus the capital expenditures necessary to grow/maintain the business); earnings per share trends; and private market value (PMV), which encompasses on and off balance sheet assets and liabilities. Our team arrives at a PMV valuation by a rigorous assessment of fundamentals from publicly available information and judgement gained from meeting management, covering all size companies globally and our comprehensive, accumulated knowledge of a variety of sectors. We then identify businesses for the portfolio possessing the proper margin of safety and research variables from our deep research universe.
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Disclaimer:
The information and any opinions have been obtained from or are based on sources believed to be reliable but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date and is issued only to and directed only at those individuals who are permitted to receive such information in accordance with the applicable statutes. In some countries the distribution of this publication may be restricted. It is your responsibility to find out what those restrictions are and observe them.
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In the first nine months of the year, 7 GPs have issued 20 private equity vehicles that are listed on the two stock exchanges in Mexico (BMV and BIVA). In total, 3 CKDs have been issued that invest in Mexico in the infrastructure, private equity, and credit sectors; while 4 GPs have issued 17 CERPIs to invest globally in the fund of funds sector.
The capital committed to invest globally amounts to 1.924 million dollars (md), while the resources that will be invested in Mexico are 882 md to give a total of 2.806 million dollars that represent 9% of the 31.538 million dollars of committed capital of all CKDs and CERPIs. Since 2018, when global investments were allowed through CERPIs, the trend has been for global diversification, hence the predominant issuance of CERPIs rather than of CKDs. Of the committed Capital, the called capital represents 57% where the called capital of the CKDs dominates with respect to the CERPIs.
All these issues were made before September 7, the date on which CONSAR published changes to the regulation of the AFOREs through the so-called “Circular Unica Financiera” also known as CUF.
Regulatory changes seek for CKDs and CERPIs to incorporate elements that offer certainty in terms of risk management, investment, and governance policies and, above all, guarantee that this type of investment does not represent an excessive cost for workers. Therefore, these changes are expected to slow down the pace of issuances in the coming months.
A total of 25 CKDs and CERPIs have been identified in the pipeline.
From 2017 to September 30, 14 began their legal issuance process in 2019; 6 in 2020 and 5 between 2017 and 2018. In general, the issuance process takes two years and the exceptions are those that manage to leave within a year of starting their legal issuance process.
14 are doing their procedure at BIVA and 11 at the BMV.
9 are CERPIs and 16 CKDs.
10 are frequent issuers of CKDs and CERPIs and 15 are new.
There are 12 that want to issue in the real estate sector (4 CERPIs), 6 in private equity (4 CERPIs); 2 debt; 2 Infraestructure; 2 in other sectors and 1 fund of funds (CERPI).
The AFOREs have 201.089 million dollars of assets under management as of August 31, of which 11.804 million dollars are investments in CKDs, CERPIs and structured (5.9% of the portfolio). Currently, investments in CKDs represent 4.8% of assets under management and only 1.1% are investments in global alternatives (CERPIs). If called capital is considered, the percentages go to 6.7% in local investments (CKDs) and 4.8% in global investments (CERPIs) to represent 11.5% with the current value of assets under management.
The diversification sought by the AFOREs will lead to the continued growth of the issuance of CERPIs.
Pixabay CC0 Public Domain. Las tres diferencias políticas que los inversores deberían vigilar en la cerra presidencial de Estados Unidos
President Trump and former Vice President Biden have notably different views about corporate taxes, energy and US-China trade, which may have a substantial impact on markets and portfolios.
As the November 3 US presidential election draws closer, the race is tightening between both candidates. While much is at stake in this election cycle, the three policy areas noted below could have a large impact on the markets and portfolio allocations. Investors should plan to adjust portfolios depending on the direction of policy after Election Day though emerging technology and infrastructure may be winners regardless of the outcome.
1. Corporate tax policy
While Mr. Trump’s corporate tax policies are ostensibly more market-friendly, Mr. Biden’s plan may be offset by other growth initiatives. He wants to reverse the Trump administration’s 2017 tax cuts, raising the corporate tax rate from 21% to 28% (keeping it below the pre-2017 rate of 35%) and creating a minimum 15% tax for corporations earning $100 million or more. He also plans to double the tax rate for foreign subsidiaries of US firms.
These policies would likely hurt earnings for sectors that benefited the most from Mr. Trump’s tax cuts (including financials, consumer staples and utilities) as well as large multinational companies with overseas operations (including technology and healthcare). However, Mr. Biden does plan to invest in growth areas such as clean energy and 5G technology. Moreover, the US economy is recovering from recession, so Mr. Biden may not make tax hikes an immediate priority – and there is no guarantee they will pass, especially if Congress remains divided.
Mr. Trump wants to maintain the status quo. The corporate tax cuts he implemented in 2017 were designed to be permanent, and he also likely wants to turn the temporary tax cuts for individuals into permanent ones. However, much depends on which party controls the US Congress after the elections – a Democratic Congress would be much less receptive to Mr. Trump’s tax proposals.
2. Energy policy
A Biden presidency could create opportunities for clean energy, while another Trump term would support the existing energy regime. Mr. Biden plans to invest heavily in areas like renewable energy and climate protection. His policy calls for a $2 trillion investment in solar, wind and other clean-energy sources, as well as incentives for manufacturers to produce zero-emission electric vehicles and energy-efficient homes.
Mr. Trump’s plan focuses more on traditional energy sources such as oil, natural gas and coal – which account for over 80% of total energy used in the US (vs. 10% for renewable energy). He would provide a friendlier tax and regulatory regime for traditional energy, as well as continued support for fracking – a drilling technique use to extract oil or natural gas from underground. The Trump administration believes its energy policies have made the US less vulnerable to shocks from the Middle East or OPEC.
3. US-China trade policy
President Trump has made US-China trade a priority of his administration – often acting unilaterally or via executive order. The two countries did agree on a Phase 1 trade deal in January, but tensions have since resumed over the pandemic and the business practices of Chinese technology firms. In a second term, Mr. Trump would likely continue his tough rhetoric and unilateral approach, perhaps spurring market volatility in the years ahead.
Mr. Biden has also pledged to be “tough on China”, but has indicated he prefers building coalitions – bringing US allies, labor groups and environmental organizations to the negotiating table. His administration would likely also view Chinese-led technology firms less favorably; Mr. Biden proposes a $300 billion investment in US technology spending (including 5G, AI and cybersecurity) to remain competitive with the Chinese. President Trump would likely favor continued US leadership in technology as well, although he has not confirmed any new policy measures to support this.
Despite their many differences, Mr. Biden and Mr. Trump are aligned in some areas that markets may not appreciate. For example, both candidates support some form of lowering pharmaceutical drug prices, favor more regulation of certain large US tech firms and hope to pass substantial US infrastructure packages, supporting areas like smart cities, roads and airports.
Historically, markets have done worse in the weeks before Election Day than in the period from Election Day to yearend (see chart). This is likely because the markets don’t like uncertainty: once an election is over, the markets are able to start factoring in the next president’s policies.
At the same time, the COVID-19 pandemic makes this a very unusual election year for the markets. While the presidential candidates spar over how they would approach the pandemic, the markets are processing new data points about regional outbreaks, vaccines, drug therapies and the pace of economic recovery – in addition to the level of monetary and fiscal support that has provided a floor for markets so far.
If the global economy does rebound in the next 12–18 months, we expect to see broader sector and geographical participation in the market’s upside – beyond the large-cap US technology stocks that have led through the crisis. Investors may want to factor this in, along with the candidates’ proposals, to consider allocations to select sectors. Cyclicals (such as select industrials, energy and financials), emerging technology with long-term growth potential (such as 5G, AI and cybersecurity), infrastructure and clean energy may all be potential winners in a post-2020 US election era.
Column by Mona Mahajan, US investment strategist and director with Allianz Global Investors
