BNP Paribas Enters into Exclusive Negotiations for the Acquisition of AXA Investment Managers

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The BNP Paribas Group announced this Thursday that it has entered exclusive negotiations with AXA to acquire 100% of AXA Investment Managers (AXA IM), which represents more than $916 billion (€850 billion) in assets under management, along with an agreement for a long-term partnership to manage a large portion of AXA’s assets.

BNP Paribas Cardif, BNP Paribas’ insurance business, after proceeding directly with the proposed transaction as principal, would have the opportunity to rely on this platform to manage around $172 billion of its savings and insurance assets.

With the combined contribution of BNP Paribas’ asset management platforms, the new business formed, whose total assets under management would amount to $1,612 billion, “would become a leading player in Europe in the sector,” the firm’s statement says.

“This project would position BNP Paribas as a leading player in Europe in long-term asset management. Benefiting from critical mass in public and alternative assets, BNP Paribas would more efficiently serve its customer base of insurers, pension funds, banking networks, and distributors. The strategic partnership established with AXA, the cornerstone of this project, confirms the ability of both groups to join forces. This significant project, which would drive our long-term growth, would represent a powerful growth engine for our Group,” said Jean-Laurent Bonnafé, Director and CEO of BNP Paribas.

The acquisition would also allow the combined businesses “to benefit from AXA IM Alternatives’ market leadership position and track record in private assets, driving further growth with both institutional and retail investors,” the firm’s information adds.

The agreed price for the acquisition and the establishment of the partnership is around $5.5 billion (€5.1 billion) at the expected closing by mid-2025.

With a CET1 impact of approximately 25 basis points for BNP Paribas, the expected return on the invested capital in the transaction would be over 18% from the third year onwards, once the integration process is completed, the information states.

The signing of the transaction is subject to the information and consultation process with the employee representative bodies. The transaction is expected to close by mid-2025 once regulatory approvals have been obtained.

“AXA Investment Managers has been an internally created success story for the AXA Group. Over the past 25 years, we have built an exceptional franchise anchored in investment expertise, an unwavering focus on the client, and a proven track record in sustainability. Thanks to the quality of its teams, AXA IM is today a leading player, especially in Alternatives in Europe,” said Thomas Buberl, CEO of AXA.

Awaiting The Harris Effect, Trump Remains The Favorite

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The Predictable Exit of Joe Biden Happened Last Weekend. According to data from Polymarket, Kamala Harris has a 92% chance of being the Democratic nominee for the November presidential election. The support from most Democrats, as well as from the 50 state party leaders, guarantees — barring any last-minute major surprise — her official nomination at the party congress at the end of August.

Although initially (and before news of Biden’s withdrawal), Robert F. Kennedy Jr. seemed better positioned, according to betting houses, Harris’s replacement seems to bring some hope to the Democratic ranks. After facing serious difficulties in attracting campaign contributions in recent weeks, they have reportedly raised over $150 million in donations in less than 24 hours since the new candidacy announcement, according to CNBC.

With barely three months before the elections, and seeing how the gap has widened substantially between Kamala and other Democratic candidates in the latest polls, it seems that the blue party is rallying around the least bad option they have. Kamala Harris’s contributions to the White House battle have a marginally positive balance.

On the negative side, Harris’s electoral record is not brilliant. She won the California Attorney General position in 2010 by only 0.8% more votes than her opponent, Republican Steve Cooley. As previously explained, she was not the preferred replacement for Biden. She also doesn’t seem likely to significantly diminish Trump’s apparent advantage in the electoral vote (vs. popular vote). Additionally, as Vice President of the current administration, she will bear the brunt of issues like inflation or lack of control in immigration that are dragging down poll numbers.

Perhaps the most unfavorable aspect, which Donald Trump will surely exploit to his advantage, is the perception among conservative Americans regarding Harris’s political positioning, which is to the left of Biden and other more conservative Democratic presidents. Considering the U.S. demographics (50.4% women and approximately 14% African Americans, with only about 23% of registered Democrats identifying as “liberals”), the median voter theorem consolidates her as a disadvantaged candidate.

On the positive side, Harris’s disapproval rating before the announcement was better than Joe Biden’s (49.5% vs. 57%). In her role as Vice President, anyone who would have voted for Biden this November would reasonably consider a scenario where Kamala would have to replace him in the Oval Office before 2028 and would be the natural alternative for Democrats in the presidential elections that year.

Additionally, it forces Republicans to rethink their strategy, facilitating their opponents’. Kamala is now in a position to attack Trump using his advanced age as a primary argument (Harris is 59 years old, compared to Trump’s 78). Counteracting the negative interpretation of her chances according to the median voter theorem, a Pew “think tank” chart suggests a “center” or moderate voter group (39%) that surpasses both blue liberals and red conservatives. In other words, if Kamala can convincingly take a step to the right — assuming, with the addition of JD Vance, that Trump won’t moderate his rhetoric — she could improve her poll numbers compared to Biden’s records.

As explained in this analysis published in 2022, Americans who actively use X to interact with politicians, media, or journalists in public forums demonstrate that Harris could leverage this tool to present a more moderate profile: as distribution graphs show, blues have much more exposure to the social network than conservative Republicans.

Applying the 13 criteria of historian Allan Lichtman, which have accurately predicted the popular vote direction in all presidential elections from 1984 to 2020 and offer an interesting framework to study contenders’ merits despite being subjective at times and dependent on almost real-time information at others, my result would favor Trump (6 or more false criteria coincide with a change of White House occupant).

In the coming weeks, we’ll start receiving poll results that will show whether the Democrats’ surprise move allows Kamala Harris to close the gap with Donald Trump. The first, from Quinnipiac University, conducted a day after the announcement, seems to point in this direction: 49% of participants supported Trump, compared to 47% for Harris, improving the 48% – 45% shown in the previous poll with Biden. Another Ipsos poll on Wednesday placed her two points ahead of her opponent. The average of the three most recent polls leaves the difference at just one point.

For now, although Trump remains the favorite, his approval rating is low at 42.3%, but it surpasses Kamala Harris’s 37.8%. The balance of the few polls conducted since July 19 gives him a three-point advantage. The bets, which have been more accurate in identifying winners in other electoral processes, are 61%-36% in favor of the Republican, although he has lost three points in the last three days.

The election remains close, and it’s important to follow the polls in the “swing states” identified a couple of weeks ago, as they could be key: a shift towards normalization in Pennsylvania, Michigan, or Wisconsin (historically Democratic strongholds now leaning the other way).

Only a month has passed since the first presidential debate, and things have moved very quickly since then. Although it’s very likely that Powell will clarify his intention to start lowering rates in September at the July Fed meeting, the other support for portfolio rotation discussed last week has become much more unstable.

The rebalancing towards more cyclical, value, and small-cap companies could continue to benefit from macro announcements pointing to a consolidation in the disinflation trend, allowing the Fed on the 31st to lay the foundations for the start of a cycle of easing monetary policy.

However, more evident signs of a cooling job market or loss of momentum in the first quarter’s industrial activity rebound would deny the hypothesis of a cycle elongation. Additionally, investors, after the initial boost, may reassess the macro implications of a second Trump term, which might not be as favorable for the stock market.

Why Will Equities Be One of the Major Stars of the Second Half of the Year?

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The presentation of the semi-annual outlook by international asset managers has highlighted three common ideas: the impact of monetary policy decisions by major central banks, the increase in geopolitical risks, and the importance of being invested in both traditional and alternative assets. In this context, the main risk for investors is staying out of the market, given the numerous sources of uncertainty and volatility on the horizon for the next six months.

According to the managers’ projections, global growth expectations are set at 3.1% in 2024 and 3% in 2025. Inflation is expected to normalize in 2024, allowing central banks to continue cutting rates, although not all at the same time. In this regard, a renewed spike in inflation after the U.S. elections is a risk that investors should watch.

Benjamin Melman, Global CIO of Edmond de Rothschild AM, notes that a year ago, the economy presented many uncertainties, as disinflation remained tepid and there were fears of a recession in the United States. However, political difficulties were relatively contained at that time. Since then, the issues have reversed. “While the economic environment now seems quite promising, it is overshadowed by political problems. The only constant has been the continuous deterioration of the geopolitical environment. This means that there could be some volatility triggered by political turmoil in France or the potential return of Trump to the White House. The good news is that markets can sometimes overreact to political crises, which can create some attractive opportunities,” Melman states.

Taking this into account, the CIO of Edmond de Rothschild AM suggests that “considering the returns recorded so far this year and the strength of the global economy, it makes sense to remain well exposed to equities.”

Opportunities in Equities

“The economic context supports profits and risk assets, but most of the upside potential is already priced in by the markets, and it will be challenging to find clear catalysts for new gains. To navigate this uncertain transition to the next phase of the cycle, we favor high-quality equities, along with a positive bias in duration and commodities to protect against inflationary risks,” adds Vincent Mortier, Group CIO of Amundi.

When discussing specific opportunities, Melman notes that within equity markets, “while the main geographical decisions (U.S. versus Europe) will largely be determined by the aforementioned political issues, the investment teams prefer Big Data and Healthcare, as well as European small caps, which are trading at very attractive valuations considering the more favorable economic environment and the monetary easing that has already begun.”

Mortier expands on his idea of high-quality equities: “Avoid concentration risks and focus on quality and valuation.” He adds that opportunities abound in U.S. quality and value stocks and global equities. “Also consider European small caps that could capitalize on the economic cycle recovery, with attractive valuations. In terms of sectors, our position is balanced between defensives and cyclicals at the lower end of the range. We are more positive on financials, communication services, industrials, and healthcare,” states Mortier.

He also believes that emerging market equities offer interesting opportunities and relatively attractive valuations compared to the U.S. “We favor Latin America and Asia, highlighting India for its robust growth and transformation trajectory,” he adds.

Ronald Temple, Chief Market Strategist at Lazard, expects to see a broadening of the equity market rally driven by better earnings growth outside the technology sector. “This broadening does not mean that tech and AI stocks will stop performing. However, it is likely that the gap between tech leaders and the rest of the market will narrow, or even reverse, as investors realize that the rest of the market has largely stagnated for more than two years and now offers more attractive return potential,” he argues.

Temple also notes that non-U.S. markets are trading at much less demanding valuation multiples and are expected to benefit from accelerated growth while the U.S. market slows down. “Additionally, non-U.S. companies are often more exposed to variable-rate debt, which should benefit them as the ECB and other central banks ease monetary policy before the Fed, and they could also experience a more significant recovery in revenues and profits from current levels,” he concludes.

Ashish Shah, Chief Investment Officer, Public Investing at Goldman Sachs Asset Management, estimates that in equity markets, stronger business models have demonstrated margin resilience, with recent earnings seasons in the United States exceeding expectations. Performance has expanded beyond the so-called Magnificent Seven.

“The second half of 2024 may present opportunities for investors to broaden their horizons beyond the largest names, with U.S. small-cap companies poised to rebound, offering attractive absolute and relative valuations. Small-cap companies can provide access to greater growth potential from future mid- and large-cap leaders. Certainty around rate cuts should provide additional tailwinds,” Shah points out.

Regarding Europe, he adds that “the improved growth and inflation mix in Europe, combined with better corporate earnings dynamics and modest valuations, bodes well for continental European equities.” In the Japanese equity market, he sees great opportunities as structural changes are driving good performance after decades of deflation.

Special Purpose Vehicles (SPV): The Key to Enhancing Investment Strategy Distribution

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Special purpose vehicles (SPVs) are a prominent and widely used option to leverage projects in the financial market. FlexFunds explains why companies set up SPVs and how they are structured:

SPVs are established as independent entities by companies of all sizes, including those backed by venture capital, to carry out specific financing projects and facilitate their administration. These vehicles are used to execute securitization strategies, allowing multiple asset classes, both liquid and illiquid, to be converted into listed securities by creating an autonomous pool of assets.

FlexFunds‘ securitization program handles large-scale agreements, allowing asset managers to securitize small or large asset volumes. FlexFunds’ SPVs can enhance the distribution capacity of an investment strategy, whether managing $1 million or $200 million.

What is a special purpose vehicle (SPV)?

An SPV is an entity created by another company, known as the sponsor, to accomplish a specific purpose by assigning it a series of goods or assets. Its activity is clearly defined and limited: to execute and exploit a specific project. This asset and risk separation is achieved through contractual and/or corporate formulas.

Generally, an SPV is identified as a business investment vehicle or vehicle company. An investment vehicle is a tool that allows capital to be raised more cost-efficiently.

FlexFunds, a leading company in the design and launch of investment vehicles, works with renowned international providers to offer customized solutions. They allow asset managers to issue ETPs through an SPV established in Ireland, fully tailored to their needs.

Structure and benefits of SPVs

Special purpose vehicles are structured as subsidiaries of the sponsoring firm and can be established in different jurisdictions, considering aspects such as tax payments. The independence of SPVs grants them legal and asset autonomy, keeping their balances separate from those of the sponsoring company.

According to the Cerulli Edge-U.S. Managed Accounts study, 71% of asset managers prioritize expanding product distribution and creating new investment vehicles. SPVs can be an effective alternative to achieve these goals due to the following benefits:

  • Market segmentation and customization: They allow the creation of investment vehicles tailored to different market segments, attracting investors with different risk profiles and preferences.
  • Transparency and trust: They offer a high level of transparency, facilitating the understanding of associated risks and benefits, and generating trust among investors.
  • Operational efficiency and cost reduction: They simplify the operational structure of an investment strategy, reducing administrative and operational costs.
  • Flexibility and adaptability: They allow the investment strategy to be adapted to market conditions, including restructuring the SPV for new assets or modifications without affecting other operations of the parent company.
  • Access to new markets and asset types: They facilitate access to markets and assets that would otherwise be difficult to reach, such as investments in emerging markets, illiquid assets, or infrastructure projects.
  • Tax efficiency: They can be structured to optimize tax implications for investors, taking advantage of specific tax benefits in different jurisdictions.
  • Improved liquidity: They provide or increase the liquidity of certain assets, allowing investors to buy and sell shares in the SPV instead of negotiating the sale of the underlying asset.

SPVs are versatile and powerful tools for enhancing the distribution of investment strategies, resulting in more effective capital raising and the creation of more robust and diversified strategies.

FlexFunds‘ securitization program structures investment vehicles that can enhance the distribution of investment strategies in international capital markets in less than half the time and cost of any other alternative in the market.

You can contact FlexFunds experts at info@flexfunds.com.

Franklin Templeton Expands Its Range of ETFs with a New Japanese Equity Fund

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Franklin Templeton expands its range of passive funds with the launch of the Franklin FTSE Japan UCITS ETF, the first ETF to track the Japan index. According to the manager, this brings the number of indexed funds offered to investors to 22.

The Franklin FTSE Japan UCITS ETF invests in large and mid-cap stocks in Japan. It is passively managed and tracks the performance of the FTSE Japan Index – NR (Net Return), a market-capitalization-weighted index representing the performance of large and mid-sized companies in Japan, aiming to capture 90% of the investable Japanese equity market universe.

“We are pleased to offer this new single-country index-tracking UCITS ETF that invests in Japanese equities to European investors. Investors can now gain diversified exposure to over 500 Japanese companies across a wide range of industries. The Japanese stock market is the second-largest stock market in the Asia-Pacific region and the largest developed market in the region. After decades of deflationary trends, Japan’s central bank recently stated that it sees a virtuous cycle between wages and prices intensifying, which should help boost consumption and investments. The country’s strong position in the global technology supply chain, including semiconductors, along with a renewed focus on corporate governance and shareholder value, should also favor the domestic stock market,” highlighted Caroline Baron, Head of ETF Distribution for EMEA at Franklin Templeton.

The new ETF will provide European investors with cost-effective and UCITS-compliant exposure to Japanese stocks, with one of the lowest total expense ratios (TER) in Europe for its category, at 0.09%. It will be managed by Dina Ting, Head of Global Index Portfolio Management, and Lorenzo Crosato, ETF Portfolio Manager at Franklin Templeton, who have more than three decades of combined experience in the asset management industry and extensive track records in managing ETF strategies.

According to Matthew Harrison, Head of Americas (excluding the US), Europe, and the UK at Franklin Templeton, following the launch of the Franklin FTSE Developed World UCITS ETF a few weeks ago, the manager is expanding its offering of core index-tracking equity products with the launch of this new low-cost FTSE Japan ETF. “With a market capitalization of $6 trillion and Japanese market returns expected to recover, Japanese equities can be a core portfolio building option for an investor’s portfolio,” highlights Harrison.

The Franklin FTSE Japan UCITS ETF will be listed on Deutsche Börse Xetra (XETRA) on July 30, 2024, on the London Stock Exchange (LSE) and Euronext Amsterdam on July 31, 2024, and on Borsa Italiana on September 4, 2024. The fund is registered in Austria, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Spain, Sweden, and the United Kingdom.

Banco Santander and Google Launch a Free Course on Artificial Intelligence

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Banco Santander and Google have reached an agreement to offer free artificial intelligence (AI) training for individuals over 18 years old from any country.

The “Santander | Google: Artificial Intelligence and Productivity” course, which debuts on the Santander Open Academy platform in Spanish, English, and Portuguese, will allow users to harness the potential of this technology to apply it in both their professional and personal lives. Improving productivity, acquiring basic knowledge, and developing the skills necessary to automate tasks, generate ideas, and solve problems more efficiently will be some of the outcomes achieved with this training.

For Rafael Hernández, Deputy Global Director of Santander Universities, “there is no doubt that AI is revolutionizing our daily lives, especially work environments, with a direct impact on creating new opportunities and professional profiles. This course provides important tools to enhance professional skills, generating greater job competitiveness and effective adaptation to the demands of the current and future market.”

“We are thrilled to partner with Banco Santander to offer this free and accessible AI training to anyone, anywhere in the world,” said Cova Soto, Marketing Director of Google Spain and Portugal. “This collaboration reflects our shared commitment to democratizing AI education and empowering people with the skills they need to thrive in the digital age. We believe that by making AI knowledge and tools available to everyone, we can unlock new opportunities for personal and professional growth.”

Course Content

The course offered by Banco Santander and Google is designed to be accessible to everyone, regardless of their prior technical experience. It is delivered in simple and direct language, facilitating the understanding of fundamental AI concepts and its growing influence in the work world. Participants will acquire the following skills and knowledge:

  • Fundamentals of AI: Understand the basic principles of artificial intelligence and how it is transforming various sectors.
  • Practical Applications of AI: Learn to use AI tools like Google’s Gemini to optimize daily work productivity.
  • Creating Effective Requests: Develop the ability to generate clear and precise requests to obtain the best results from AI tools.

This course is a unique opportunity for professionals from all fields to familiarize themselves with AI and acquire practical skills to leverage its potential in their professional lives. Upon completion, users will receive a certificate that will validate the training they have received.

Santander’s Commitment to Education, Employability, and Entrepreneurship

Banco Santander has maintained a pioneering and solid commitment to education, employability, and entrepreneurship for over 27 years, distinguishing it from other financial entities worldwide. The bank has allocated more than €2.3 billion and supported over 1.5 million people and businesses through agreements with more than 1,200 universities. Through Santander Open Academy, it offers access to a wide range of skill enhancement training with 100% subsidized courses, free educational content, and scholarships with leading universities and institutions worldwide. Additionally, it has been recognized as one of the companies contributing most to making the world a better place, according to Fortune magazine’s “Change the World” list for 2023 (www.santander.com/universities).

What Changes and What Doesn’t with Biden’s Withdrawal?

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New twist in the U.S. presidential race. Finally, Joe Biden, the current president and Democratic candidate, has announced his withdrawal from re-election, stating in a social media release, “in the interest of my party, the country, and my personal interest.”

In the same statement, Biden added, “Although my intention was to seek re-election, I believe that the best course for my party, the country, and myself is to withdraw and focus solely on fulfilling my duties as president for the remainder of my term.” While Biden has committed to addressing the nation in the coming days to provide more details about his decision, the big question now is who from the Democratic Party will challenge Trump. So far, Kamala Harris has confirmed her candidacy for the presidency, already receiving Biden’s explicit support.

In recent days, the pressure for Biden to make this decision had been mounting, but the doubts about his candidacy began with his performance in the debate against Trump. After the debate, Libby Cantrill, Head of Public Policy at PIMCO, explained that the decision to stay in the race was solely his, not the Democratic Party’s or the donors’.

“Biden currently controls 99% of the delegates, and what happens with those delegates is his decision. Of course, no candidate has withdrawn this late in the race. The party has planned its entire campaign around his candidacy, and it’s important to note that presenting a new candidate is incredibly complicated; there is no clear consensus alternative,” Cantrill said earlier this month. At that time, the PIMCO expert saw Biden’s withdrawal as “unlikely,” though he acknowledged that the chances were higher than before the debate. “If that outcome occurs, we believe an announcement will be made in the next week or two,” he noted. In this sense, Cantrill’s predictions have come true.

Another prediction gaining strength is that Trump will win the election. Just hours later, polls already show that his candidacy has been reinforced, as was the case after the assassination attempt he survived last week. For example, in a poll conducted by Bendixen & Amandi Inc., Kamala Harris has a one-point lead over Trump, surpassing him 42%-41%. However, according to a CNN and SSRS poll, the Republican candidate has 47% of the vote, while Harris has 45%, “a result within the margin of error suggesting no clear winner in such a scenario,” they explain.

The next step is clear: Democratic delegates will select a new candidate for the nomination just a few weeks before the Democratic Convention, in a race against time to garner the necessary support for the November elections. “So far, the only sure bet is Kamala Harris. Biden has expressed his support for the vice president, and she has accepted to take his place. Harris finds herself in a delicate position at a time when a Trump victory is being discounted. On the Republican side, Trump has proclaimed Ohio Senator J.D. Vance as the party’s vice-presidential candidate. Additionally, he announced some of his proposals, such as reducing the maximum corporate tax rate, imposing more tariffs, and keeping Powell as Fed chairman until the end of his term,” Banca March experts point out.

What Would Change

A clear change is that the scenario of a victorious Trump, explained by managers in their semi-annual outlooks, is gaining strength. For example, when Paul Diggle, chief economist at abrdn, addressed these scenarios, he pointed to one where Biden would win and three variants of a Trump presidency depending on the combination of policies.

In this sense, Diggle analyzed and measured the impact of Trump returning to the White House. “First, a Trump focused on the trade war, with a 30% probability. A divided Congress could see him pursuing those aspects of his agenda through executive order, drastically increasing tariffs. This would put upward pressure on inflation, lower growth, and slow or halt monetary easing,” he explained.

Secondly, Diggle contemplated, with a 15% probability, a scenario marked by an “all-out” Trump, combining trade measures with tax cuts and increased spending under a unified Congress. In his opinion, this would likely cause significant market volatility. And thirdly, “a market-friendly Trump focused on tax cuts, deregulation, and the appointment of establishment figures, with a 10% probability. The economy and risk markets could perform well,” Diggle pointed out.

Another aspect currently under debate is whether a second Trump presidency would mean higher inflation now that it seems to be subsiding. “In our opinion, Trump’s policy mix would likely be more inflationary than a continuation of Biden’s policies, implying that in 2025 the Fed would apply fewer rate cuts in this case,” noted Claudio Wewel, currency strategist for J. Safra Sarasin Sustainable AM.

In the opinion of Michael Strobaek, Global CIO of Lombard Odier, a second Trump administration would be more inflationary. According to Strobaek, the U.S. currency might appreciate further as the dollar is likely to rise in anticipation of additional tax cuts in 2025, “America-first” import tariffs, and the possibility of stricter immigration policies restricting the labor market.

“These inflationary pressures would lead to higher long-term bond yields and a steeper U.S. yield curve. This is one of the reasons why we prefer German bunds to U.S. Treasury bonds while maintaining exposure to global fixed income at strategic levels. In equities, we continue to favor non-U.S. markets, where valuations and market concentration risks are lower. We maintain U.S. stocks at strategic levels,” adds Lombard Odier’s Global CIO.

As Bloomberg explained this Saturday, “while the Republican Party has been trying to blame Biden for residual inflation, it is Trump’s plans that could undo the hard-won progress of the Federal Reserve.” In this sense, they noted that “economists warn that his policies, another round of tax cuts that, according to Democrats, will go to the wealthy, widespread tariff hikes to trigger another trade war with China, and immigration restrictions that Republicans blocked earlier this year, will wreak havoc on global trade and reignite inflation.”

In fact, a group of 16 Nobel laureates signed a letter stating that Trump’s arrival would bring higher prices. “Many Americans are concerned about inflation, and there is a legitimate concern that Trump will reignite it due to his fiscally irresponsible budgets,” they said in the letter. Among the signatories are George A. Akerlof, Sir Angus Deaton, Claudia Goldin, Sir Oliver Hart, Eric S. Maskin, Daniel L. McFadden, Paul R. Milgrom, and Roger B. Myerson.

What Wouldn’t Change

While Biden’s decision gives the campaign a major twist, some macro aspects may remain unaffected, as one of the main theses experts have defended so far is that, in terms of monetary policy or public deficit, for example, the electoral outcome wouldn’t matter.

For example, Steve Ellis, Global CIO of Fixed Income at Fidelity International, recently explained that in the medium to long term, there are even greater problems for the Fed. “Regardless of whether Biden or Trump wins in the November elections, we will likely see more budget deficits added to an outstanding U.S. public debt that already hovers around $35 trillion. To continue financing this and attracting investors, either real interest rates remain relatively high, or real yields do. That will limit the interest rate easing the Fed can apply, and considering that around 40% of the notional volume of high-yield debt in circulation will have to be refinanced at significantly higher levels over the next three years, the pressure on the U.S. economy will increase.”

Experts have also focused heavily on analyzing market behavior during other election processes. “Equity markets tend to welcome a decisive victory for Republicans in the White House and Congress, but have generally reacted worse to Republican presidents without absolute majorities. While returns are usually positive in election years—albeit a bit weaker than usual—they can rebound strongly once the elections are over,” explained Erik L. Knutzen, Chief Investment Officer and Multi-Asset Director at Neuberger Berman, at the end of May.

Five Funds to Enjoy the Olympic Games

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The Paris 2024 Olympic Games will feature no fewer than 32 sports, each with various disciplines. Among them is modern pentathlon, consisting of five different sports: fencing, freestyle swimming, equestrian show jumping, pistol shooting, and cross-country running. This event is like a microcosm of the Olympic Games themselves: five very different sports requiring diverse skills, yet somehow working together to form a whole.

According to Victoria Hasler, Head of Fund Analysis at Hargreaves Lansdown, in many ways, modern pentathlon mimics fund management. “Any investment can be rewarding, but a portfolio of investments is usually much more beneficial. Just as cross-training in different sports leads to fewer injuries for athletes, a well-constructed portfolio of different investments can lead to lower volatility and better outcomes for investors.” In this sense, Hargreaves Lansdown has identified five fund ideas to include in a “modern pentathlon” portfolio:

Fencing: Troy Trojan Fund

“The use of what are essentially swords can make fencing seem like an aggressive sport. In reality, there is as much skill in defense as in attack. The managers of the Troy Trojan Fund, Sebastian Lyon and Charlotte Yonge, work with a similar philosophy, seeking to protect investors’ wealth as much as grow it. Instead of aiming for exorbitant returns, the fund seeks to steadily grow investors’ money over the long term while limiting losses when markets fall,” says Hasler.

Freestyle Swimming: BNY Mellon Multi-Asset Balanced Fund

In a freestyle swimming race, competitors are free to swim any stroke they choose (though it is extremely rare to see swimmers use anything but the fastest stroke: the crawl). According to Hasler, multi-asset fund managers have similar freedom, able to choose the markets and instruments most suitable to conditions.

This is the case with the BNY Mellon Multi-Asset Balanced Fund, which focuses on companies with good long-term prospects worldwide, along with some bonds and cash to act as diversifiers. The underlying universe of possible investments for this fund is large and includes emerging markets, smaller companies, high-yield bonds, and derivatives. For those who like a free approach but don’t want to make asset allocation decisions themselves, a fund like this could be a good option.

Equestrian Show Jumping: Invesco Tactical Bond Fund

Equestrian show jumping requires real skill. Not only must the rider be one with the horse, but together they must navigate various obstacles while appearing calm and completely in control. For Hasler, bond markets are similar, and bond managers must also possess the skills to navigate the obstacles of the global economy and geopolitics. The managers of the Invesco Tactical Bond Fund do just this.

“The fund is co-managed by Stuart Edwards and Julien Eberhardt, who can invest in all types of bonds, with very few restrictions imposed on them. The fund’s performance depends on their ability to interpret the broader economic landscape. They seek to protect the portfolio when they foresee tough times ahead; and seek strong returns as more opportunities arise. Depending on the managers’ views, at different times, this can be a relatively high-risk bond fund or be managed conservatively. Calm, serene, and always in control: the dream of a show jumper,” she explains.

Pistol Shooting: Rathbone Global Opportunities Fund

Shooting a pistol is a deliberate and specialized skill, but one that must be used with caution and control. This is similar to the skill of James Thomson, the manager of the Rathbone Global Opportunities Fund. The fund invests in global stock markets (including the UK) and gives exposure to a wide range of stocks. Thomson is undoubtedly a skilled investor and one of the few global fund managers who has demonstrated that he can pick great companies and outperform the broader global market over the long term.

“His success is due to a simple, skillful but disciplined approach, and a willingness to see the world a bit differently. Global equity markets can be a minefield, but Thomson navigates them with ease. He shows all the characteristics that a great pistol shooter should have: skill, caution, and control,” adds Hasler.

Cross-Country Running: iShares Emerging Markets Equity Index Fund

Cross-country running requires endurance and adaptability. These are characteristics we also see in emerging markets funds. From large Asian countries like China and India to Brazil and Mexico in South America, these countries offer much potential as part of a portfolio for investors looking for long-term growth opportunities. But it may take time for them to fully develop, so the risks are higher, and higher levels of volatility should be expected.

“The iShares Emerging Markets Equity Index Fund aims to track the performance of the broader emerging markets equity market and is one of the lowest-cost options for investing in these markets. The fund invests in a wide range of companies based in emerging countries, including China, India, Brazil, South Africa, and Taiwan. It’s a convenient way to invest in emerging markets. However, there is potential for volatility along the way, so investors may need endurance,” concludes the analyst.

Fund Performance vs. Benchmark Index

US Equities Could Come Under Pressure in the Second Half of 2024

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Pixabay CC0 Public DomainAndrea Baratella from Pixabay

U.S. stocks moved higher in June, with big tech continuing to drive the performance during the month for both the S&P 500 (+4%) and the Nasdaq (+6%). The ongoing AI spending boom has significantly boosted major indices, spearheaded by one of the top holdings Nvidia, which has soared ~150% this year.

The “Magnificent Seven” stocks now represent nearly one-third of the S&P 500’s weighting and have driven approximately 60% of this year’s gains. In the first half of 2024, the S&P 500 has achieved 31 record highs – the most for any first half since 2021. These dynamics heighten the risk of market concentration for investors. Combined with concerns over slower economic growth, a cooling labor market, and reduced consumer spending, the current bull market rally may face pressure to the upside in the latter half of 2024.

On June 12, the Federal Reserve kept interest rates unchanged for the seventh consecutive meeting and signaled that just one rate cut is expected before the end of the year. The Fed noted that there has been modest further progress toward its 2% inflation target. The next FOMC meeting is July 30-31.

In June, the Russell 2000 Value significantly underperformed the S&P 500, and now lags in year-to-date performance by over 1,700 bps. We anticipate a favorable environment for smaller companies as post-peak rates and necessary consolidation in certain industries such as media, energy and banking should lead to a more robust year.

Despite several positive catalysts for deals in M&A, the continuation of a “risk-off” market for merger arb investors, likely exacerbated by forced selling, crimped performance in June. The spread on International Paper’s all-stock acquisition of DS Smith narrowed after Brazilian pulp producer Suzano dropped its unsolicited bid to acquire International Paper which had caused uncertainty over IP’s ability to complete the acquisition. Additionally, a major customer of Catalent received positive news from the FDA that will yield increased sales for Catalent, and creates a higher floor for Catalent’s standalone value per share. Johnson & Johnson completed its $13 billion acquisition of Shockwave Medical for $335 cash per share, and TDR Capital completed its €3 billion acquisition of Applus Services SA for €12.78 cash per share.

 

Opinion article by Michael Gabelli, managing director at Gabelli & Partners 

 

 

Biden, Trump, and Harris: Three Pieces in a Game with a Timid Impact on the Markets So Far

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“I deeply respect this office, but I love my country more. It has been the honor of my life to serve as your president. However, I believe that defending democracy is more important than any title.” With these words and a brief 11-minute speech, Joe Biden, President of the United States, explained his decision to withdraw as a candidate for re-election. This marks the end of a week dominated by analyses of how this shift will affect the market in the race for the White House.

Undoubtedly, the first question to answer is who will replace Biden as the candidate. For now, the name gaining the most traction—in terms of money and public support—is Kamala Harris. “In recent days, the idea of mini-primary elections has gained momentum, potentially allowing for a short and open competition among the best and brightest of the Democratic Party. This is particularly relevant since the approximately 4,700 delegates responsible for nominating a new Democratic candidate are not obligated to support any particular candidate following Biden’s decision to withdraw,” notes Kaspar Köchli, an economist at Julius Baer.

According to Ahmed Riesgo, CIO of Insigneo, although senior Democrats are not thrilled with Harris, it is widely assumed that she will perform better than Biden at this point. “Given the aggressive shift of consensus opinion towards a Red Wave in November, replacing Biden with Harris on the ballot could alter expectations somewhat,” says Riesgo.

In his view, “removing Biden’s vulnerabilities from the Democratic side should immediately reduce the polls, while Trump continues to face a myriad of political headwinds that will come to the forefront as people stop talking about Biden’s physical and mental capabilities.”

For now, Harris’s chances of winning the Democratic nomination are around 80%, but only the meeting of the Democratic National Convention’s Rules Committee on Wednesday will provide more clarity on how the coming weeks will unfold.

In Köchli’s opinion, a Harris campaign signals fiscal and trade policies consistent with Biden’s, reaffirming the status quo in the markets. “The market has reacted moderately, slightly improving the odds of a Harris presidency over Trump to 40%. Markets will closely watch if Democrats can use the momentum of change to expand support and overcome what one Democratic strategist described as a situation where Trump is unpopular, but Harris is simply unknown, thereby reducing the current slight Republican advantage in presidential and congressional races,” adds the Julius Baer economist.

Advantage for Trump

“We consider that if a Democratic victory occurs, it will be to maintain a scenario of political continuity, as what a Democratic presidency implies is reasonably predictable. However, there is still great uncertainty about what exactly a Trump presidency would mean for the economy and markets,” says Lizzy Galbraith, a political economist at abrdn.

Most analyses from investment firms agree that a Republican victory scenario is increasingly likely. What would be its impact on the market? According to Galbraith’s analysis, of the 60% chance of a Trump victory, three possible scenarios could arise: “A 2.0 trade war with a 30% chance; a 100% Trump with a 15% chance; and Trump fulfilling market expectations with another 15%.”

In Mathieu Racheter’s opinion, Head of Equity Strategy Research at Julius Baer, Trump’s victory favors cycles. “We expect a modestly positive initial reaction from the equity market following the election results. This is based on the prospect of laxer regulation, the application of antitrust mergers, financial sector regulation, and a likely extension of the Tax Cuts and Jobs Act (TCJA), which expires in 2025, alleviating fears of a corporate tax increase,” he notes.

These developments, along with increased fiscal spending, should lead to higher economic growth in the US (2.4% versus our forecast of 1.9%), resulting in higher profit growth for the equity market, according to Racheter. “Historically, during an election year, equity volatility tends to increase mid-year, just before the primaries, and begins to decrease after the elections. Depending on the results starting to reflect in the equity markets in the coming months, opportunities will open up for investors,” he elaborates.

According to George Brown, senior US economist at Schroders, a Trump victory could pose inflationary risks for the US economy. “The central pillar of Trump’s economic agenda is protectionism. If re-elected, Trump has proposed increasing it to 60% and gradually eliminating all imports of essential goods from China. Additionally, imports from the rest of the world would be subject to a 10% basic tariff. If implemented, these proposals would result in a significant inflationary shock. However, we suspect Trump does not intend to fully implement them but rather use them selectively to gain trade concessions,” explains Brown.

The consensus is that a Trump presidency would mean corporate tax cuts, deregulation, a reversal of the climate change agenda, and higher national tariffs. “We also expect a more aggressive foreign policy, especially against China, which could also be bad news for emerging markets. There is also likely to be less aid for Ukraine and less support for NATO,” adds Steven Bell, chief economist for EMEA at Columbia Threadneedle Investments. Finally, Bell states that the impact on the dollar is unclear, but both the fundamental context and the prospect of Trump 2.0 seem to favor equities. “But it is really a wait-and-see scenario,” he notes.

According to AXA IM, each candidate brings a different policy: “Trump would likely focus on tariffs, tax cuts, migration, and deregulation. His victory would also raise concerns about geopolitics, all of which would mean headwinds for growth. Harris is likely to adopt Biden’s plan to focus on partial extensions of tax cuts and deficit reduction with a milder crackdown on immigration. An opposition-led Senate would likely block the approval of that agenda.”

The Impact on Markets

As Garrett Melson, global strategist at Natixis IM Solutions, points out, “despite all the consternation around the winners and losers of the elections, historically the effect of elections is quite ephemeral, and the profit cycle ultimately determines market behavior after the elections.”

In general terms, he reminds us that the political repercussions in the markets tend to be short-lived. In fact, he points out that there are both upside and downside risks to consider in any election result, particularly a Trump victory, but he explains that companies have repeatedly demonstrated their dynamism and adaptability, suggesting that investors should have confidence in the markets’ ability to shake off any short-term impact from electoral events as the fundamental economic backdrop remains constructive.

“Trade remains a considerable wildcard and an area where Trump continues to have strong convictions and flexibility to act largely unilaterally without congressional approval. The increase in tariffs not only on China but also on Europe is likely to weigh on growth, both domestically and internationally. Tax cuts are a concern as the policy of the Tax Cuts and Jobs Act is extended and potentially new cuts are unveiled,” Melson specifies.

Finally, Michaël Nizard, head of Multi-Assets and Overlay at Edmond de Rothschild AM, believes Biden’s withdrawal could benefit European markets. “It would not be surprising to see a slight recovery in European risk assets compared to the US after several weeks of clear underperformance. In fact, several econometric studies show significant impacts on European growth, around 1%, in the event of a resurgence of strong trade tensions related to Trump 2.0. As for the ongoing sector rotation, we believe it may continue, and the recent underperformance of the technology sector will depend more on the upcoming earnings season than on the national political situation,” he explains.

Regarding the dollar, Nizard insists that the Republican candidate has been quite favorable to a depreciation of the greenback in the primary interest of American manufacturers. “We explain the dollar’s decline in July more as a response to the easing of US rates and the imminence of the first Fed rate cut in September. Thus, we consider that the dollar will stabilize awaiting new data. In the longer term, the widening of US deficits will raise the question of the sustainability of its financing and the valuation of the dollar,” he concludes.