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Numbers More Terrifying Than Halloween Night

Today, when the sun sets, children will go out dressed in costumes to ask for candy. No matter how much effort they put into scaring, their mischief is charming. However, U.S. market and macroeconomic numbers could frighten more than Freddy Krueger himself, as reviewed by New York Life Investments.

Rates Rise in the Markets’ Tower of Terror

Interest rates have been rising as strong economic growth and persistent inflation have discouraged hopes for rapid Fed rate cuts. The drop in rates from July to October was based on expectations of an aggressive rate-cutting cycle, but the reality is that the economy hasn’t changed enough to justify such a move, according to the asset manager. With stable growth and a steady labor market, the outlook points to higher rates.

The rise in long-term yields, however, is likely related to the increased chances of a “red wave” in the last two weeks. The market is pricing in the potential impact of some of Trump’s worst fiscal policies, along with a significantly higher Treasury supply.

The Exorcist’s Girl: Public Debt Is Losing Effectiveness

Nothing was scarier than the scene in “The Exorcist” when the girl starts rotating her head 360 degrees. Investors feel similar terror watching the increase and inefficiency of U.S. public debt.

In the past, public spending financed by debt used to have a greater “multiplier effect” on GDP: every borrowed dollar could generate more than a dollar of economic activity. But as debt levels rise, that multiplier tends to diminish. Additionally, as debt levels increase, more public spending goes towards servicing existing debt rather than funding productive investments, limiting fiscal flexibility and reducing the overall economic benefit of borrowing.

“We see an electoral victory by either party as the greatest risk for investors, as it could lead to more aggressive debt growth compared to a divided Congress. If debt and the deficit continue to expand, it is likely that interest rates—especially long-term yields—will rise, reflecting escalating risks,” the report warns, like the priest brandishing the cross in the movie, but with little success.

Frankenstein at the Market Bazaar: The Nightmare for Small Caps, Rate Hikes Haunt the Market

Higher rates only scare if you have to pay them. Large-cap companies are better insulated as they hold more long-term and fixed-rate debt. In contrast, small caps tend to have more variable-rate debt, making them more vulnerable to higher long-term rates. This has made profitability particularly challenging for small-cap companies in the current environment.

“The recent performance of small caps has been volatile, but there are still opportunities to find winners. If the economy achieves a soft landing and growth reaccelerates—which is not our base case—we would be more confident in superior small-cap returns,” sums up New York Life Investments.

A Happy Ending or an Open Ending for a Saga

These figures come in a politically and geopolitically tense context. Additionally, weakening economies and global job losses have brought trade to the forefront. Many countries are setting trade barriers in their national interest, including the U.S.

However, this shift presents both risks and opportunities. Slower globalization could increase costs and inflation, reducing corporate margins. But it is also driving regionalization, creating opportunities in reshoring and domestic production, says the report.

As seen in horror movies, the ending will depend on how quickly the investor can run and find a safe haven or how cleverly they can overcome the situation and stake the vampire.

In terms of long-term portfolios, the asset manager suggests focusing on regions and companies that can adapt to a more fragmented global economy, such as Southeast Asia and Mexico.

The Fed Is Expected to Pursue a 25 Basis Point Rate Cut Regardless of the Election Outcome

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Expectativa de recorte de tipos por la Fed

Although all eyes are on the vote count in the U.S. to confirm Donald Trump’s victory, the market faces a relevant event between today and tomorrow: a new Fed meeting. According to investment firms’ assessments, a new 25 basis point cut is expected, given macroeconomic data showing a strong economy and declining inflation.

For Allianz GI, the Federal Reserve surprised the market by starting its rate-cutting cycle with a larger-than-expected 50 basis point reduction. In the opinion of Michael Krautzberger, Global CIO of Fixed Income at Allianz Global Investors, with this move, the Fed signaled a significant shift in its monetary policy strategy, once again prioritizing employment, which is one of its two main responsibilities, along with price stability, under its dual mandate.

“The projections from the September Fed meeting showed a median forecast of additional 50 basis point cuts by the end of the year and another 100 basis points in 2025. The forward rate markets have largely reflected this outcome, with a terminal rate for this cycle around 3.5%. Thus, these Fed measures have increased, at least for now, the likelihood of a soft landing in the U.S. in 2025, although historically, this is a rare outcome,” explains Krautzberger.

Experts agree that the labor market slowdown and moderation of inflationary risks allow the Fed to continue gradually reducing its policy rate. “The FOMC will likely continue lowering its target for the federal funds rate, as the current target range of 4.75%-5% remains quite restrictive. After a bold initial 50 basis point cut, the FOMC indicated that it would proceed gradually and be data-dependent. Current data fully justifies a 25 basis point cut at Wednesday’s meeting. Future data, and particularly any shifts in economic policy in light of the U.S. election results, will determine whether the Fed continues with 25 basis point cuts after the November meeting and brings rates to a more neutral level of 3.5% by mid-2025,” adds David Kohl, Chief Economist at Julius Baer.

25 or 50 Basis Points

According to Benoit Anne, Managing Director of the MFS Investment Management Investment Solutions Group, the Fed still has work ahead. Anne acknowledges that current macroeconomic conditions allow the Fed to begin the anticipated easing cycle but notes it might be too early to celebrate. In fact, Anne observes lingering anxiety following recent labor market developments, signaling limited room for further deterioration before recession risks become a major concern again.

“We are far from reaching the goal, namely, a federal funds rate starting with a 3 and not a 5. This week, the market seems divided between the possibility of a 25 or 50 basis point cut, with a 36 basis point cut already priced in. Our Chief Economist, Erik Weisman, leans toward a 25 basis point cut this month, although he believes the Fed should opt for 50, but it seems like a difficult decision. The 25 basis point move appears reasonable, as the Fed may want to avoid any action that might be perceived as panic-driven. Ultimately, we believe persistence and stability in future rate cuts, while maintaining flexibility for more aggressive policy if the macroeconomic context deteriorates, is crucial,” he argues.

Bank of America is more assertive, predicting a 25 basis point cut: “We expect the Fed to cut rates by 25 basis points at its November meeting. The FOMC statement should change little, except for policy action language and the new target range. We also do not anticipate major shifts in Chairman Powell’s message. He is likely to downplay much of the October labor data weakness but may highlight downward revisions to August and September payrolls as cause for concern. The November meeting should not be a major event; elections have far greater implications for markets overall, and even for the Fed’s policy path.”

In their latest report, the institution notes that since the Fed is unlikely to deliver any surprises in November, attention should quickly shift to Powell’s signals for the December meeting. “Once again, we expect Powell to emphasize data dependence and provide limited forward guidance. While we see rising risks for the terminal rate, it is likely too soon for Powell to open that door,” states Bank of America.

Uncertainties Ahead

However, Christian Scherrmann, U.S. Chief Economist at DWS, believes uncertainties remain. “In particular, we remain cautious about inflation prospects. Since labor market weakness seems to be more a product of data quality and volatility, inflationary pressures—while receding—remain a significant factor. We also believe demand remains sensitive to lower interest rate expectations,” Scherrmann points out.

Another source of uncertainty is yesterday’s elections. According to the DWS economist, there is a high probability of no clear picture of who will be president and what Congress will look like. “With all these uncertainties, central bankers still have to fly with an eye on the economy, and we expect data dependence to be the central message of the press conference, likely with a slightly hawkish tone. But with current interest rates still well above what can be considered neutral, the Fed certainly has room to maneuver at the November and December meetings. For the December meeting, it may be harder to determine if we will see another cut or if the Fed will pause in normalizing monetary policy. By then, at least, we should have a clearer idea of what to expect from lawmakers.”

In this regard, Michaël Nizard and Nabil Milali, managers at Edmond de Rothschild AM, add: “We must remain alert to the risk to the Fed’s independence, given Trump’s stated desire to interfere in the institution’s decision-making, although it will be difficult for him to challenge Jerome Powell’s presidency before his term ends in 2026.”

Additionally, Roger Aliaga-Díaz, Vanguard Global Head of Portfolio Construction and Chief Economist Americas, reminds that the central theme of economic and market outlooks for 2024 was that interest rates above their pre-pandemic levels are here to stay. In his view, this implies that for the Fed, the neutral rate—the projected level of interest rates that theoretically keeps the economy in equilibrium without overheating or overcooling—is higher than in the previous decade.

“We consider factors such as rising structural fiscal deficits and an aging population to conclude that the nominal neutral rate hovers around 3.5%. I would expect the Fed to raise its estimate even further through 2025. As the Fed lowers its target for the federal funds rate from the current range of 4.75%-5% over the coming months, it will ease its grip on an economy no longer facing the imminent threat of runaway inflation. Finding the right balance in the pace of rate cuts is the toughest task for any central bank. Moving too slowly increases the risk of a hard landing; moving too fast raises the risk of rekindling inflation. Naturally, the Fed has focused intensely on finding a middle ground or a soft landing,” Aliaga-Díaz comments.

What Do Voters Prefer?

Finally, it is difficult to fully separate this Fed meeting from yesterday’s elections. Deborah A. Cunningham, Chief Investment Officer of Global Liquidity Markets at Federated Hermes, notes that voters would prefer to avoid a central bank move this week, but the significant cut essentially demands some action to preserve credibility. “If they reduce the target range by a quarter point, as we expect, they could keep rates stable in December before easing again in January, continuing a cut/no-cut pattern for several meetings,” she explains.

In her view, the presidential elections are creating significant disruptions, but regardless of who wins, inflationary policies are likely to be enacted. “This meeting is more decisive for the front end of the yield curve. Interestingly, the uncertainty stems as much from the Fed’s 50 basis point cut in September as from the analysis of recent data. While Fed Chairman Jerome Powell is unlikely to have any regrets, some policymakers may lament the size of the cut, based on the flurry of speeches and appearances since then,” argues Cunningham.

Trump Returns to the White House, and the Market Repeats the 2016 Script, With Increases in Equities and a Stronger Dollar

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“This will be America’s golden age, it’s an incredible victory.” With these words, Donald Trump, the Republican Party candidate, declared himself the winner of the U.S. presidential elections. Without the official count having ended, Trump reportedly garnered 267 electoral votes compared to the 224 of his Democratic opponent Kamala Harris. Additionally, the Republicans have taken control of the Senate and aim to maintain their slim majority in the House of Representatives.

As expected, following such a significant event, markets have reacted quickly. According to Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson, futures indicate an increase of over 2% in the S&P 500 and 1.7% in the NASDAQ. “However, the most notable parts of the U.S. market are the S&P Midcap 400 and Russell 2000 indexes, with futures showing gains of over 4% and 5%, respectively,” notes the manager.

In his view, perhaps the most surprising result so far is the strength of stock markets outside the U.S. “European and Japanese equities are performing well, and the decline in China is perhaps less than many feared, despite the incoming President’s threats to global trade. The U.S. dollar is generally strengthening as markets consider the potential impact of new import tariffs and further discounted Federal Reserve cuts. U.S. Treasury yields have risen sharply due to both evolving interest rate expectations and the possibility of higher inflation,” explains Blackbourn.

Regarding what to expect next, the Janus Henderson manager considers it likely that markets will begin to think about how rhetoric translates into policy and scrutinize every statement over the coming months for clues. “With the widespread view that both parties will continue running budget deficits, it seems likely that the U.S. economy will remain hooked on fiscal stimulus. The effect this will have on the Fed may take some time to clarify, as the FOMC will be reluctant to consider anything until there is greater political clarity. Markets will have to wait to see if the Federal Reserve is willing and able to address a hot economy,” he adds.

In the opinion of Gordon Shannon, manager at TwentyFour AM (Vontobel boutique), so far markets are repeating the 2016 script following Trump’s victory: equities are rising, while long-term U.S. Treasury bonds are retreating due to expectations of fiscal expansion. “I believe the focus will shift to the inflationary implications of tariffs and immigration control. The Federal Reserve has avoided making comments so far to appear neutral and protect its independence, but its reaction to these policies is key to understanding where asset prices are headed,” Shannon states.

For Stephen Dover, Head of Franklin Templeton Institute, the biggest beneficiaries will be sectors and industries that welcome a more business-friendly regulatory environment, including fossil fuel energy companies, financial services, and smaller-cap companies. “On the other hand, the fixed income market is selling off strongly, with ten-year Treasury yields approaching 4.50%. Fixed-income investors are reacting to the likelihood that tax cuts will not be accompanied by significant spending restraint. The fixed income market also anticipates higher growth and potentially higher inflation. This combination could slow or even halt the Fed’s anticipated rate cuts,” adds Dover.

Finally, Martin Todd, senior manager of Global Sustainable Equities at Federated Hermes, believes the immediate market reaction has been one of relief. “On the eve of the election, there was great concern about the possibility of a prolonged and tightly contested election, given how close the polls were. There are many different opinions on which sectors, business models, and geographies are winners or losers under a Trump administration and a ‘red sweep.’ But this depends heavily on the time frame. Understanding the medium- to long-term implications for equities is incredibly difficult, given the many second-, third-, and fourth-order (and so on) consequences of each policy announcement,” Todd argues.

Currency movements

Since yesterday, a segment of the market appeared to lean towards his victory, although investment firms acknowledge that what remains important is how proposed policies are implemented and the power balance between the Senate and Congress. According to Ebury, yesterday’s massive emerging market currency sell-offs and the dollar’s rise were a prelude to Trump’s likely victory.

“The markets are not only positioning for a comfortable Trump win in the Electoral College but also for the prospect of a Republican-controlled Congress, which is key to determining the incoming president’s ability to push for policy changes within the U.S. government,” Ebury analysts note.

Experts from the firm add that “we are witnessing massive emerging market currency sell-offs as investors price in higher U.S. tariffs, elevated geopolitical risks, and greater global uncertainty under a Trump presidency.”

As in 2016, the biggest loser of the night so far has been the Mexican peso, which has fallen more than 2% against the dollar. Meanwhile, according to Ebury, Central and Eastern European currencies are also being significantly affected amid fears over European security, while many Asian currencies closely tied to China’s economy are trading down more than 1% overnight.

“The major currencies seem to have found some footing for now, and the dollar’s upward movement has perhaps been a bit more contained relative to expectations. However, we wouldn’t be surprised to see another episode of dollar strength as European markets open and final results confirm what appears to be a historic election victory for Trump and the Republican Party,” predict Ebury analysts.

Assessing the results

“The question of a Trump victory will be decided in the House of Representatives election, where Republicans are also leading. Voters likely punished the Democratic presidency of Biden due to high living costs, a legacy of the coronavirus pandemic, concerns about Middle Eastern policy, and a perception of Harris’s unclear profile, which failed to garner voter support despite a strong economy,” explains David A. Meier, economist at Julius Baer.

In the opinion of Samy Chaar, chief economist and CIO at Lombard Odier in Switzerland, if Republicans control both chambers of Congress and the White House, we could expect a more dynamic U.S. economy, with growth above potential and inflation higher than the Federal Reserve’s target.

“It is likely that interest rates will also exceed pre-election expectations. The race for the House of Representatives will determine whether campaign promises can be fully implemented. A divided Congress would impose some limits on the President. The issue of tariffs is key for global trade and Fed easing prospects,” states Chaar.

For the Lombard Odier economist, this has major implications for financial markets: “Macroeconomic fundamentals remain a driver for investments. We foresee that high-yield credit and gold will perform well. Global equities, including U.S. stocks, also have potential upside over the next 12 months as earnings rise and margins remain high. In the U.S. market, the financial, technology, and defense sectors are expected to perform well under a Trump administration.”

According to the Julius Baer economist, betting markets have massively tilted in favor of a Trump victory, with implied odds approaching 90%, while the prospect of a Harris victory has almost dropped to zero. “Markets are pricing in the greater likelihood of a Trump victory, with the U.S. dollar strengthening beyond the euro/dollar 1.08 mark and currencies from economies potentially impacted by higher tariffs falling,” he adds.

Implications of a Trump administration

Investment firms are already evaluating the impact of Trump’s return to the White House. For example, David Macià, director of Investments and Market Strategy at Creand Asset Management in Andorra, believes that the most relevant market implication is the promised tax cuts, which should initially boost economic growth, stocks, and the dollar. “Trump’s policies are inherently inflationary and expand the already high deficit, so market-traded interest rates are also expected to rise. The aggressive tariff hikes promised by the Republican candidate should weigh on companies that export to the U.S., especially if they do not have factories on American soil (many European companies may suffer initially). The weight these companies have on European indexes suggests they may again lag behind,” states Macià.

Creand AM sees the potential for stocks to continue on an upward trajectory. “The American economy remains unusually strong, and unlike when he won in 2016, markets now know exactly what to expect. The starting point is the only obstacle, as valuations are high, but this has little correlation with short-term price behavior,” adds the firm’s representative.

For Johan Van Geeteruyen, CIO of Fundamental Equity at DPAM, investors can look to cyclicals (financials, energy, etc.) and certain technology companies as possible beneficiaries, while tariffs and geopolitical tensions pose risks to specific sectors. “Ultimately, Trump’s policies may foster a favorable environment for U.S. equities, especially if deregulation, domestic manufacturing, and fiscal policies create incentives for growth. However, headline risks—ranging from fiscal uncertainties to trade disruptions—could create periods of volatility, affecting both domestic and global markets,” Geeteruyen notes.

Finally, according to a summary by Blair Couper, CIO at abrdn, in the long term, a Trump victory is likely to mean a laxer regulatory environment, an escalation in trade tariffs, and potential attempts to repeal components of the Inflation Reduction Act (IRA). According to abrdn’s expert, it is also likely that the share prices of U.S. companies with supply chains in China will react negatively, while domestic manufacturing and small and medium-sized U.S. companies may perform better.

“With President Trump at the helm, the U.S. also faces elevated inflation risks due to these policies, so we are likely to see a reaction from interest-rate-sensitive sectors and a strengthening dollar. Sectors such as financials (i.e., banks) could perform well if rates remain elevated for a longer period. While areas like real estate and growth stocks could be negatively impacted by longer duration, this may be offset by a generally positive market outlook driven by his policies, so we still need to see whether these sectors are negatively impacted or not,” Couper concludes.

Artificial Intelligence is Everywhere

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Artificial intelligence everywhere — Photo courtesy

The capabilities of artificial intelligence are advancing with the investment focus expanding from computing power to include additional layers of the technologies used to build web or mobile applications. As a result, we are finding more opportunities to invest in stocks of companies that are leaders or beneficiaries of AI.

In our new paper Artificial intelligence is everywhere, we provide an overview of the AI theme and how it is enabled by cloud computing and foundational science and technologies including semiconductors¹. It touches on some of the recent advancements as well as the risks and challenges of developing and using AI.

AI is supported by foundational science and technologies such as:

Cloud computing: Essential for training and hosting AI models
Internet of Things: Collects data necessary for AI applications
Semiconductors: Provide the computing power for AI
Cybersecurity: Protects AI systems and data
Renewable energy: Helps ensures sustainable power for energy-intensive AI operations.

Use cases for AI are expanding rapidly and include code generation and documentation for developers; automating customer requests; summarising medical reports and simplifying sales and marketing workflow. Such applications improve productivity and efficiency.

Recent advancements in AI technology include making new large language models capable of complex reasoning and problem-solving; making user interactions with AI models more intuitive; and the arrival of next-generation semiconductors to support AI training and inferencing².

Harnessing the cloud

Cloud computing with advantages including lower costs, scalability, enhanced security and access to advanced technologies provides the necessary infrastructure and resources for AI development and deployment. Thus, investment in digital infrastructure is crucial for supporting AI initiatives. This includes datacentres, networking equipment, and storage systems. There is also growing demand for cooling systems, energy efficiency, and renewable energy sources to power AI datacentres.

The three major US cloud service providers grew cloud revenue by more than 30% over the last four years, surpassing USD 180 billion in combined revenue in 2023³. Despite this, there is still a long growth runway: only about 20% of total workloads has migrated to the cloud.

Cloud service providers, large enterprises and government entities are investing heavily to build and equip the datacentres required to support AI initiatives. Our outlook for investments in digital infrastructure over the next several years is positive.

Today, most of the capital investment is focused on computing power, driving demand for semiconductors. Providers of server computers and other datacentre equipment are seeing robust growth. Some of the focus is likely to shift in favour of investment in networking and storage equipment to support training and inferencing of large language and other AI models.

We expect the long-term returns of developing and deploying AI technology to be attractive. Companies that expand beyond the infrastructure layer and create new applications or services are likely to see higher returns on investment. However, the high cost of components is a key variable.

Key investment opportunities

Here are the main areas:

Developers: companies creating AI innovations; cloud service providers training and hosting AI models; semiconductor companies

Foundational technologies: high bandwidth memory and networking chips; semiconductor capital equipment and materials suppliers; foundries; providers of networking and data storage systems; providers of energy efficiency and alternative energy solutions, such as cooling and solar panels

Data providers: companies with proprietary data sets that can be used to train AI models and provide competitive advantages

‘Beneficiaries’: Companies leveraging AI to improve products and services.

Challenges and risks

These include stricter regulations, for example, on copyright and data rights slowing innovation and demand for AI infrastructure.

There is also a need to avoid bias, produce accurate outputs, and ensure that real content can be distinguished from fake information.

Finally, AI systems and data need to be protected from cyberattacks.

Conclusion

Arguably, artificial intelligence is the most significant technology theme since the dawn of the internet age.

As AI technology advances and becomes more pervasive, we believe the investment opportunities among publicly traded equities are broadening. Capitalising on the positive trends while avoiding potential pitfalls will require an active approach to investment management.

Opinion article by Pamela Hegarty and Derek Glynn, BNP Paribas AM

The Rise of Small and Micro Caps: Investors Will Increase Their Allocation Over the Next 12 Months

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A global study by New Horizon Aircraft reveals that fund managers are increasingly interested in small and micro-cap stocks. The report, based on a survey of fund managers from the U.S., Canada, Europe, the Middle East, and Asia, with a total of $82.4 billion in assets under management, concludes that 76% of respondents anticipate that institutional investors’ exposure to small and micro-cap stocks will increase in the next six to twelve months. Furthermore, one in three (34%) fund managers believes allocations could increase by 25% or more.

For retail investors, the trend will be similar: 83% of surveyed fund managers expect retail investors to increase their allocation in the next six to twelve months, with 52% indicating that the allocation could rise by more than 25%, and one in eight (12%) suggesting that exposure to small and micro-cap stocks could increase by more than 50%.

“One in three fund managers describes the current level of institutional investor exposure to this type of asset as underweight, with 21% of respondents describing the allocation to micro caps as slightly underweight and 11% describing it as extremely underweight. The current level of exposure is described as overweight by 4% and 23%, respectively. A similar outlook is seen with retail investors, with fund managers describing the allocation of this group to small and micro caps as underweight (32% and 27%, respectively) and as overweight (17% and 13%, respectively),” the report notes.

In the opinion of Brandon Robinson, CEO of Horizon Aircraft, this analysis shows that fund managers believe institutional and retail investors’ exposure to small and micro-cap stocks is lower than it should be. “However, with anticipated interest rate cuts and expected improvements in market conditions, fund managers foresee investors significantly increasing their allocation to small and micro-cap stocks. As the economy recovers, small and micro-cap companies may have greater growth potential than large-cap companies due to their smaller revenue bases and agility in seizing opportunities. This has historically made them more attractive to investors driven by the potential for high returns and accelerated earnings growth in the coming 12 months,” he explains.

The Final Stretch of the Year in the U.S.: Elections and Markets on Separate Paths

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With just days until the U.S. decides its president, the market is starting to anticipate a Trump victory without major hesitation.

Despite the short-term market volatility around elections, U.S. equity performance tends to be fairly “indifferent” to which party takes the White House, especially if Congress remains divided. As a starting point, it seems somewhat “pointless” to link a market outlook to a party aspiration, says a Fynsa report.

Generally, markets have risen under both Republican and Democratic presidents, and the reason is that “markets simply go up, and over 100 years of modern history, the compounded annual growth rate is practically identical under presidents of both parties,” adds the study.

However, some sector-specific impacts can be observed depending on the candidate. For example, Republicans would focus on deregulating the economy and creating a positive fiscal boost from tax extensions.

Trump could replace Jerome Powell, potentially leading to unpredictable changes in Fed policy.

There might also be a higher risk of increased tariffs against China and moderate risks against global tariffs. Mega-cap stocks could be affected by higher tariffs, given the additional costs arising from relocation and potential Chinese retaliation against these control measures.

But, overall, highly regulated industries such as healthcare, energy, and the financial sector are potential relative winners under a Trump presidency.

On the other hand, the economic policies and measures proposed by both candidates are likely to contribute to an increase in the fiscal deficit, although experts at Fynsa expect the deficit to be larger under Trump. “The most bipartisan thing in the United States is that public spending keeps growing. The national debt was $19 trillion when former President Trump took office and $28 trillion when he left. And the Democrats have added another $7 trillion to the debt,” the report adds.

Looking Toward Year-End

The third quarter will continue to be a test for big names related to artificial intelligence, according to a report by Sarah Stillpass, Global Investment Strategist at J.P. Morgan Private Bank. In line with Fynsa, Stillpass does not believe that the elections or Middle East unrest are reasons to dismantle long-term plans.

“We believe the most important implications are those resulting from policies after the elections, and it’s important to recognize the difference between a short-term operation and a fundamental trend,” says the J.P. Morgan report.

For these reasons, with just under 70 days until year-end and just over a week until the next FOMC meeting, the U.S. bank provides a series of recommendations for investors.

First, the expert recommends identifying goals and creating a long-term plan for effective portfolio maintenance. “Just like medical check-ups, regular portfolio reviews are equally important,” the bank’s text notes.

Economic and market dynamics can shift both short-term and long-term, which can lead to unexpected impacts. For this reason, it’s important to review your target asset mix and consider the possibility of rebalancing.

Secondly, “it’s crucial” to maintain a long-term perspective and focus on fundamentals. Remember that markets tend to record gains regardless of who is president. If market uncertainty causes doubt about your portfolio allocation, take it as an opportunity to review your goals and plan.

Lastly, the strategist recommends using available tools to improve portfolio efficiency. “Integrating technology and innovation into investment strategies can enhance portfolio performance in the long run.” For example, artificial intelligence, “which can improve the active portfolio management process by allowing managers to gain a competitive edge through better data analysis and faster decision-making.” Additionally, this technology can improve more traditional strategies, such as tax-loss harvesting, which involves realizing losses to offset gains, concludes the expert.

The Growth of Active ETFs Is Unstoppable: Their Assets Have Reached $1.05 Trillion Globally

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The ETF market shows great strength worldwide, as do actively managed ETFs, which achieved assets of $1.05 trillion as of the end of September, surpassing the previous record of $1.01 trillion set at the end of August 2024. This figure indicates that assets have increased by 42.5% so far in 2024, rising from $737.06 billion at the end of 2023 to $1.05 trillion.

According to ETFGI, flows show that this type of vehicle recorded net inflows of $26.50 million in September, bringing total inflows for the year to $240.14 billion. “This year’s record cumulative inflow of $240.14 billion is followed by cumulative net inflows of $113.80 billion in 2023, and the third-highest record was $106.90 billion in 2021. This was the 54th consecutive month of positive net inflows,” the report states.

Additionally, the report highlights that in the United States, where actively managed ETFs can use semi-transparent or non-transparent models, only 52 of the 1,659 actively managed ETFs use a semi-transparent or non-transparent model, representing only $14 billion of the $791 billion invested in these strategies.

In light of this data, Deborah Fuhr, managing partner, founder, and owner of ETFGI, notes: “The S&P 500 index rose 2.14% in September and is up 22.08% so far in 2024. The developed markets index, excluding the U.S., increased by 1.26% in September and is up 12.53% in 2024. Hong Kong, with a rise of 16.51%, and Singapore, with a rise of 7.43%, saw the largest increases among developed markets in September. The emerging markets index rose by 7.72% in September and is up 19.45% in 2024. China, with an increase of 23.89%, and Thailand, with an increase of 12.43%, registered the largest gains among emerging markets in September.”

As of the end of September 2024, according to ETFGI data, the global actively managed ETF/ETP industry included 2,962 ETFs/ETPs, with 3,679 listings, assets of $1.05 trillion, offered by 485 providers across 37 exchanges in 29 countries. By strategy type, globally focused equity ETFs saw net inflows of $15.49 billion in September, raising cumulative net inflows for the year to $139 billion, surpassing the $76.15 billion in cumulative net inflows in 2023. Meanwhile, actively managed fixed-income ETFs attracted net inflows of $10.19 billion in September, bringing cumulative net inflows to $86.36 billion, significantly more than the $36.20 billion in 2023.

A substantial portion of these inflows is attributed to the top 20 active ETFs by new net assets, which collectively captured $12.75 billion in September. The BlackRock Flexible Income ETF (BINC US) led with the highest individual net inflow, capturing $1.58 billion.

Fundamentals or Market Sentiment: The Ongoing Gold Rally, Under Debate

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Gold prices have hit new highs. Midweek, the ultimate safe-haven asset reached $2,753 per ounce, marking a 33% increase for the year. According to experts, geopolitical tension stemming from the Middle East explains this surge.

At the start of the week, Ned Naylor-Leyland, gold investment manager at Jupiter AM, noted that the recent rise in gold prices was primarily due to futures contracts rather than physical demand or central bank purchases. “This is a crucial distinction as it highlights the nature of the gold market and how the dollar price of the yellow metal is driven not by physical trends but by futures market activity.”

He also pointed out that gold has gained prominence as central banks seek a buffer against the financial stability risks posed by rising geopolitical tensions, as well as events like the global financial crisis and the coronavirus pandemic. “Around one-fifth of above-ground gold reserves are held by central banks,” Naylor-Leyland added.

In contrast, Carsten Menke, Head of Next Generation Research at Julius Baer, believes this price surge has more to do with market sentiment than fundamentals. “The impressive rally in gold continues, with prices surpassing $2,700 per ounce last week. When looking for factors driving this rally, it appears to be mainly momentum and market sentiment. The position of short-term speculative traders and trend followers in the futures market recently reached one of the highest levels on record. Such extreme euphoria is typically a warning signal, as it shows a certain detachment of prices from fundamental factors,” Menke argues.

He explains that the U.S. dollar and U.S. bond yields have risen again as expectations for rate cuts have tempered. As a result, he notes that already moderate inflows into physically-backed gold products have slowed even further. “Gold buying in Asia remains weak, as indicated by Chinese imports, physical deliveries, and domestic price premiums. India’s gold imports have also normalized after high volumes in response to a surprising cut in import duties,” the Julius Baer expert added.

Short-Term Outlook

Despite this debate over the drivers behind gold’s price growth, there is a consensus on its positive short-term outlook. Marcus Garvey, Head of Commodities Strategy at Macquarie, agrees that gold’s “practically steady” rally continues, once again outperforming other assets. “While recent gains have not been explosive, the pace has been faster than estimated in our base scenario in September, when we updated forecasts, projecting an average price of $2,600 per ounce in the first quarter of 2025, with potential to advance toward the $3,000 per ounce level,” he indicates.

Macquarie maintains that challenging budget outlooks across developed markets are now a key feature of the bull market.

“Clearly, the upcoming U.S. elections contribute to uncertainty in this area. The scope and potential effectiveness of stimulus measures from Chinese authorities remain unclear, but if they succeed in significantly boosting the domestic equity or real estate markets, or both, it could dampen Chinese demand for gold,” Garvey argues.

“We continue to see a solid fundamental outlook for gold,” says Menke, explaining, “A further cooling of the U.S. economy and the prospect of lower interest rates in the U.S. could attract more Western investors to the market. The same applies to the U.S. presidential elections, which are reportedly prompting gold purchases by major investors who believe that, regardless of who reaches the White House, the U.S. dollar will be under pressure due to rising fiscal deficits.”

Finally, Julius Baer adds that Chinese investors and the People’s Bank of China should also return to the gold market. “For the former, it’s about the persistent weakness of the economy despite recent support measures. For the latter, it’s the low proportion of gold in its foreign exchange reserves and ongoing geopolitical tensions, especially with the U.S. In this context, short-term pullbacks are likely to be seen as buying opportunities,” Menke concludes.

The Miami Industry Hopes for a Quick Resolution of U.S. Election Results

| For Marcelo Soba | 0 Comentarios

Impacto de las elecciones en EE.UU. en Miami

On Tuesday, November 5, U.S. elections will close, and who will lead the White House remains a big question. Although Donald Trump holds a slight edge according to betting markets, what matters most to the financial industry is a swift announcement of results without any dispute.

With this context, Miami’s buy-side representatives are analyzing potential scenarios and how the elections could impact investors.

Ignacio Pakciarz, Founder and CEO of BigSur Partners, expressed that he expects a “Red sweep” where Republicans win both the executive and both houses of Congress.

“We’re basing this primarily on betting markets and a range of financial indicators that consistently point to this outcome,” the expert stated.

According to Pakciarz, the market could experience a minor “relief rally” of 2-3% just from the elimination of electoral uncertainty—so long as there is no “contested election,” which would be the worst scenario. On the other hand, for BigSur’s CEO, “the best outcome would be a divided government.”

Alejandro Behrens, Managing Director at MAXIMAI Investment Partners, commented that he expects a “highly contested election” that will hinge on the swing states.

Behrens warns that “the market will react depending on the clarity and speed with which the results are known.” He agreed that much will also depend on how balanced the government will be, taking into account the Senate and House results.

“Markets usually tend to prefer a more divided government. For me, the best outcome for investments would be one where the winner is known quickly. I think the worst scenario would be one where doubts linger, and it takes several days or even weeks to find out who the new president will be. This would definitely not be positive for the markets and would cause a lot of uncertainty,” he reflected.

Fernando de Frutos, Chief Investment Officer at Boreal Capital Management, outlined three scenarios that could affect the market.

Firstly, who ultimately wins and how anticipated the result was. Secondly, whether the losing party contests the results; and finally, how Congress will be structured.

According to De Frutos, currently, prediction markets show Trump with a slight lead and around a 30% probability of a “Republican sweep.” However, “this advantage has been declining, and polls indicate a very close race,” he clarified.

Given these possible scenarios, for Boreal Capital Management’s CIO, a “Republican sweep” could be positive for stocks in the short term, but might impact bonds, as deficits and tariffs could lead to a rise in interest rates, which in turn could place downward pressure on stocks.

In this regard, De Frutos clarified that “investors generally value all available information, but the impact of fiscal and economic policies often materializes over time and may not immediately influence markets.”

However, the effects of policies related to regulation, tariffs, and taxes tend to be more immediate, the expert explained, noting that the “Trump trade” in 2016 serves as a clear reminder of how markets can react swiftly to policy changes.

Investor Recommendations

It’s well-known that election periods bring volatility and uncertainty for investors. For this reason, financial advisors need to have clear recommendations for their clients.

In this aspect, BigSur Partners “prioritized a healthy rotation toward sectors with good valuation levels.” According to Pakciarz, these sectors would benefit from deregulation that a Trump administration would bring.

Behrens, for his part, worked to help his clients “stay calm and continue with a long-term focus regardless of the election outcome.”

De Frutos, in turn, believes that beyond the “immediate market reaction,” regardless of the electoral outcome, the U.S. will continue to be one of the most attractive markets for investors.

The expert emphasized that for clients with a medium- or long-term investment horizon, “these elections are basically background noise” and noted that historically, stock markets have risen under both Republican and Democratic presidents, and “staying out of the market can be costly in the long run.”

“Since post-election market reactions are notoriously hard to predict, we do not recommend making drastic adjustments based solely on the election results,” he concluded.

Securitization and alternative assets: New opportunities for portfolio management

| For Romina López | 0 Comentarios

Nuevas oportunidades en securitización y activos alternativos — Image created with AI

In the current climate of economic uncertainty, market volatility, and increasing geopolitical risks, portfolio diversification has become a priority for asset managers. Traditional strategies based on equity and bond investments have proven insufficient to mitigate the inherent risks of financial markets. Alternative assets emerge as a critical tool here, providing managers with new diversification opportunities to enhance portfolio resilience and profitability, FlexFunds highlights.

Alternative assets encompass investments in real estate, private equity, infrastructure, private debt, commodities, art, and collectibles, among others, characterized by their low correlation with traditional assets. This makes them an attractive option for managers and investors seeking to reduce portfolio volatility and mitigate the adverse effects of economic cycles.

In a high-inflation, high-interest-rate scenario, managers need to explore opportunities outside traditional markets. Alternative assets offer stability and potential returns, helping safeguard investment value during uncertain times. David Elms, head of diversified alternatives at Janus Henderson Investors, highlights that, during periods of economic transition, alternative investments can generate long-term returns independent of equity or fixed-income markets, particularly in bearish conditions.

Today, portfolio managers are increasingly turning to asset securitization to optimize their diversification strategies. This tool enables converting illiquid assets into tradable securities, facilitating distribution among investors. For managers, this approach opens up access to assets that would otherwise be unattainable due to their illiquid nature.

Securitization not only improves the liquidity of underlying assets but also provides an additional source of diversification. According to the II Annual Report of the Asset Securitization Sector by FlexFunds and Funds Society, portfolio managers are more familiar with securitizing traditional, tangible assets such as real estate projects, loans and contracts, and stocks.

One of the main advantages of alternative assets is their ability to generate absolute returns—i.e., positive returns regardless of market conditions. Portfolio managers incorporating these assets into their strategies aim to minimize economic cycle dependency by diversifying their investments into areas less correlated with equity or fixed-income markets.

In line with this, and based on a survey conducted by FlexFunds and Funds Society to over 100 investment and portfolio management experts, the most sought-after assets for securitization include real estate projects, loans and contracts, stocks, bonds, and mutual funds, as shown in Figure 1.

Source: II Annual Report of the Asset Securitization Sector 2024-2025

Figure 1: Assets of greatest interest for securitization

In addition to diversification and risk mitigation, alternative assets provide access to sectors undergoing growth and economic transformation. According to the same report, the most common types of alternatives that managers include in their portfolios are detailed in Figure 2.

Source: II Annual Report of the Asset Securitization Sector 2024-2025

Figure 2: Alternative product in the portfolio

However, investing in alternative assets also entails challenges that must be managed carefully. The lower liquidity of these assets, as well as their opacity and lack of regulation in some cases, can increase risks. To mitigate these, rigorous due diligence and an experienced management team are crucial to understanding each alternative investment’s unique characteristics.

From a manager’s perspective, integrating alternative assets into investment strategies represents both an opportunity and a responsibility. The challenge lies in identifying suitable assets that align with investors’ objectives and risk profiles. The selection of these assets should be accompanied by constant portfolio review and adjustment, considering market fluctuations and emerging opportunities.

In this context, FlexFunds, as a leader in designing and issuing investment vehicles (ETPs), facilitates access to international markets, especially in a financial environment where diversification through alternative assets is key. With its securitization program, FlexFunds offers managers the ability to:

Issue ETPs at half the time and cost of other alternatives available in the market.
Securitize multiple asset classes, including alternatives.
Facilitate distribution of alternative assets across banking platforms worldwide via Euroclear.
Streamline capital raising from international investors.
Simplify the onboarding and subscription process for investors, compared to traditional alternative asset subscriptions.

For further information, please contact one of FlexFunds’ experts at contact@flexfunds.com