What is Trumponomics?

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Markets are increasingly attentive to the economic proposals of the Republican candidate for the U.S. presidency, Donald Trump, and their implications not only for the country but also for the global economy. Barclays Bank presents an analysis to evaluate what it calls Trumponomics, referring to the economy under a possible Trump presidency.

Higher tariffs, reductions in corporate taxes, restrictions on migration to the United States, and more protectionism are some of the bases of the economic program proposed by Trump.

Often, their immediate effect could be partially offset by countermeasures (e.g., retaliatory tariffs), exchange rate adjustments, and substitution effects, which in turn depend on supply and demand elasticities, not known beforehand.

However, the firm indicates that it seems fair to say that a combination of higher trade tariffs and reduced migration are, in principle, negative supply shocks with inflationary consequences. At the same time, lower taxes without equivalent spending cuts would primarily stimulate demand (though potentially with some positive supply effects as well).

This would point to a U.S. economy with strong (real) growth but also greater inflationary pressures. This means: a rapid expansion of nominal GDP, with higher nominal interest rates and a strong U.S. dollar as an exchange currency.

Deregulation could offset inflationary pressures to the extent that it translates into a positive supply shock and increased productivity, although such effects traditionally take time, Barclays noted.

The financial firm provided a summary of the key policy proposals that have emerged so far and some of their macroeconomic implications:

Higher Tariffs

Trump has been vocal about his perception of unfair global trade, particularly focusing on countries with which the United States has large bilateral trade deficits (such as China and the European Union). He and his team, centered around former U.S. Trade Representative Robert Lighthizer, have suggested implementing a 10% tariff on all imports to the United States and a 60% tariff on Chinese imports. If implemented, this would raise the average U.S. tariff to the highest level since the 1950s, marking a significant departure from the post-World War II global trade regime.

Lower Taxes

Trump described his economic doctrine as “low interest rates and low taxes.” Therefore, it is very likely that a Trump administration would extend its 2017 tax cuts. He has also pledged to further reduce the corporate income tax cost from 21% to 20%, and in an interview with Bloomberg, he floated the idea of lowering it to 15%, although he admitted that “this would be difficult.”

Less Migration

Trump has promised to reduce immigration, which reached a record level in 2023. Immigration flows have been a key source of American exceptionalism during the post-pandemic period, providing a strong tailwind for aggregate supply that has helped sustain disinflation amid solid consumption-driven expansion. Policies to curb the flow of asylum seekers would reduce labor supply and growth.

Less Regulation

The Trump administration would likely take a significantly different approach from the Democrats, particularly regarding energy and the environment. The effects of this could be complex. For example, expanding oil production could be a positive supply shock, but slower adoption of electric vehicles would increase oil demand. In any case, a limited effect on oil market fundamentals is expected in the short term. Similarly, reducing bureaucracy could facilitate business operations, but repealing some laws could affect investment and employment.

Realigned Geopolitics

There are potentially significant changes from current policies that markets cannot ignore. First, Trump and JD Vance (vice presidential candidate) openly talk about ending the war in Ukraine by withdrawing support for Ukraine and thus forcing an agreement with Russia. Secondly, they maintain their anti-China views, but Trump has raised doubts about the U.S. commitment to defend Taiwan. Thirdly, in the Middle East, Trump would likely refocus on strong relations with Saudi Arabia.

A general theme that seems certain is that under Trump’s presidency, the United States would expect its allies, whether Europe or Taiwan, to “pay” or rely less on the protection provided by the United States.

The eventual return of the businessman and reality TV star to the U.S. presidency, which seems increasingly likely, would bid farewell to Bidenomics, the costly experiment of industrial subsidies and protectionism, said Barclays, but Trumponomics would arrive, with effects and consequences still unknown for the United States and the entire world.

Alternative Assets: Can Latin America Learn From European Experience?

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Pixabay CC0 Public Domain

This year, the Chilean market received the long-awaited news that the Central Bank has finally decided to raise the investment limits for Chilean pension fund managers (AFPs) investing in alternative assets. This decision is in line with the global trend of sustained growth and interest in this asset type, being an important contributor to both diversification and positive returns for fund managers worldwide, whether they are state entities, pension funds or private managers.

Given its variety of sub-assets and sectors, its relatively short existence compared to liquid assets, and its rapid growth and evolution, the growth of the alternative assets fund industry undoubtedly presents numerous difficulties, challenges and opportunities for all its stakeholders: managers, investors, companies, regulators, legal advisors, consultants, etc. One example is the range of topics we see discussed at various levels on a daily basis: valuation, reporting, liquidity, sustainability and ESG, secondary markets, government participation, distribution and democratization, to name a few.

US as key influence to date

However, in this article we want to focus on a longer-standing question, which cuts across this entire booming industry, both in Chile and the rest of Latin America, and relates to the ideological inspiration behind it. To put it simply: where should we look for references, solutions and innovations?

Readers will no doubt agree that the initial reflex response is: to the north, particularly to the US. Perhaps it is enough to look at Chile’s vigorous venture capital industry, with its recent explosion and growth, which seems to be the clearest example of this Anglo-Saxon inclination. Cliff, Vesting, Reverse Vesting, Safe, Convertible Notes, Preferred Shares, Pre-Money, Post-Money, Seeds, Flip and many others, are all terms that have made their way into our business and legal world. From California and Delaware, straight into our contracts and the structuring of our companies, passing through the not inconsiderable obstacles of our legal system, our language and – even – the scrutiny of our public bodies.

These regions have so far dictated, and in a very decisive way, the development of this industry. Is there anything wrong with that? Not at all. Chile and Latin America have merely looked where the whole world looks: where the investors, transaction volume, knowhow, specialists and latest trends are, and where (until now) legal and institutional certainty have been.

Today’s circumstances prompt fresh scrutiny

However, it is healthy for any industry, especially one that has been developing for several years and has reached a certain level of maturity, as the alternative assets industry has, to have certain moments of introspection. Raising capital and investing (or advising or overseeing) are not the same today as they were ten, five or even two years ago.

In addition to the back and forth of macroeconomic cycles, there is an ever-growing list of global factors to consider. To highlight just a few, these include:

  • political and geopolitical risks (both totally contained until very recently but now constantly changing and unpredictable);
  • socio-economic evolutions (or regressions);
  • the digital revolution and artificial intelligence in their wide-ranging (and even incommensurable) manifestations;
  • the diverse economic and social after-effects of the pandemic;
  • citizen empowerment;
  • accountability and criticism of public institutions; and
  • various industry sector and regulatory trends in different fields.

In short, there is today a level of uncertainty and fragility that western economies have not experienced for several decades and that we probably believed had been consigned to history and the previous century.

For all these reasons, it is absolutely essential for a mature industry to constantly ask itself where it can find the material and intellectual resources to continue growing in a sustained manner.

Latin America’s close cultural and legal links with continental Europe

A truism to make the point: Latin America is a heterogeneous region, a mix of different influences and cultures, which is impossible to reduce to just a handful of common characteristics to indicate that we are or are not a certain way. However, it is equally evident that there are at least two elements that are largely present throughout the continent and that are by no means negligible.

First, language and market “culture”. Whether it is Spanish or Portuguese, English is clearly not the predominant language, indeed it is sometimes less widely spoken than it should be and than we would like in professional contexts. Also, markets like ours are usually more accustomed to developing sustainable businesses over time, rather than US exponential-growth type companies. Second, the legal system: with a few exceptions, Latin America adopts a continental Europe style (civil law) legal system and not the common law.

Given that we mostly share our cultural and legal base with continental Europe, it seems paradoxical that we do not give it enough weight when seeking institutions, concepts, models and useful references for Latin American legal, economic and business realities.

Luxembourg as an example

Without going into detail, it has been a pleasant surprise to observe, for example, that Luxembourg, the largest investment fund center in the world after the US, bases its very diverse investment vehicles on exactly the same legal and economic institutions as our own region. Corporations, limited liability companies and limited partnerships (sociedades en comandita) are cornerstones of a jurisdiction where pension funds, severance funds, insurance companies, banks, other institutional investors, sovereign wealth funds, mutual fund and alternative fund managers, family offices and HNWI from all over the world come together to invest, in turn, in the most diverse parts of the planet.

Indeed, a substantial part of the Luxembourg investment fund industry is based on commercial laws, codes, administrative practice and – perhaps most importantly – economic-legal principles essentially similar to those of Chile and the rest of Latin America. UCITS, UCI II, SIFs, SICARs, RAIF, SPF, etc., may sound like utterly foreign and complex concepts, but they are nothing more than the regulatory wrapping beneath which lie the same companies that we have in each of our countries.

Leveraging European expertise for Latin American growth

For these reasons, and this is valid for the investment funds and alternative assets industry and also for our overall legal and economic reality, the problems to be solved and the possible solutions to be explored from a European perspective will often coincide with those of our region. Likewise, it is not unreasonable to argue that it should be possible to “import” these solutions in a much easier, more fluid and natural way than those brought from the Anglo world.

Further, in matters where Europe diverges from Latin America, Europe should still be seen as an important source of knowhow. In our opinion, these matters are mainly due to the communitarian character of the EU economy and the powerful impulse provided by the aggregation and direction of budgetary, monetary, human and intellectual resources that – so considered – make up the second largest world economy and have generated a regulatory vanguard in practically all the issues that are of interest to Latin America.

EU knowhow on topical regulatory issues for the alternative assets industry

Thus, ESG, data protection, cybersecurity, AML, corporate governance, public-private collaboration, Fintech, “passporting” of services and promotion of private equity and venture capital, are all topics that affect the alternative assets industry in various ways. For these topics and many more, there are EU Regulations, Directives, soft law, Guidelines, recommendations and – even more relevant – several years of implementation and development.

Practical lessons for Latin America

In particular, so much could easily be learned from the other side of the Atlantic regarding, for example:

  • fund structuring (co-investments, parallel vehicles, feeders, masters, continuation funds, warehousing);
  • strategies (private equity, debt, real estate, infrastructure, venture capital, crypto, etc.);
  • relationships with investors (institutional, HNWI, retails);
  • distribution, redemptions, liquidity and incentives for managers (carry);
  • governance of the various vehicles (boards and intermediate committees);
  • relationships with regulators and state agencies (impossible not to think of the CORFO programs in Chile and how the European Investment Fund, the European Investment Bank and the various national agencies do it);
  • relationships with investee companies (transactions and financing at different levels and in different jurisdictions);
  • distribution/marketing, investment and outreach at regional and global levels;
  • impact funds;
  • sustainability; and
  • reporting.

Time to look more into Europe

In conclusion, if we add the last component (technical, regulatory and practical vanguard) to our first point (legal and cultural proximity), then looking more closely at Europe seems practically an imperative, rather than merely a suggestion. Is everything that is done and legislated in Europe good and a model to follow? Of course not, but even in matters that have not been handled in the best way there, the opportunity to “learn from trial and error” is available. The resources are there, we just have to take the time to use them.

Strategies in Soles Lead the Growth in the Boom of Mutual Funds in Peru

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The mutual fund industry is experiencing a favorable moment in Peru, showing promising growth figures at the end of the first half of 2024. One contributing factor is increased investor confidence in the local economy, highlighted by Credicorp Capital Sociedad Administradora de Fondos (SAF), which is reflected in a growth in strategies in soles that surpasses those in dollars.

The market reached 40 billion soles (approximately $10.65 billion) as of June this year, according to a presentation shared by the manager with the press. This represents a growth of 58% since mid-2023.

In the presentation, Óscar Zapata, General Manager of Credicorp Capital SAF, emphasized that –isolating the exchange rate effect– the fund market in soles grew more than 30% in the period, while dollar strategies registered an increase of 20%.

What explains the boom in the industry in the Andean country? According to the manager’s analysis, 35% of the overall market growth comes from fund appreciation –with better fund returns– and the exchange rate effect. The remaining 65%, they estimate, comes from new client balances, noting a year-over-year growth of more than 10% in participants.

Better Conditions

Regarding the increased interest of local investors, Zapata highlighted two key variables: interest rates and confidence in Peru.

From the perspective of interest rates, Credicorp Capital points out that the scenario of decreasing rates makes mutual funds a more attractive option –in terms of profitability– than other savings alternatives. This is in a context where the Central Reserve Bank of Peru (BCRP) has been gradually lowering reference rates from the peak they held during most of 2023, from 7.75% to the current 5.75%.

Additionally, Zapata explained, there is greater client confidence in the local economy, which promotes the investment of resources through local fund management, rather than various investment options abroad. Reflecting this, he noted, is the more marked boom in vehicles in soles versus dollars.

Looking ahead, Credicorp Capital SAF expects the mutual fund market to continue growing in the second half of the year. They estimate that the industry should close the year with assets above 45 billion soles (approximately $12 billion). This is explained by the anticipated economic reactivation in the second half of the year and further rate cuts by the U.S. Federal Reserve and the BCRP.

BlackRock Bets on Japan, AI, Quality Companies, Emerging Markets, and Europe

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BlackRock has focused on the real economy in its investment strategy for the second half of 2024. This was acknowledged by Javier García Díaz, Head of Sales for Iberia at BlackRock, during the firm’s presentation of its outlook for the second half of the year.

“We are in interesting times with challenges and opportunities for investors,” said García Díaz, who admitted that the firm shows a preference for risk “but with control” and that one must be alert to the opportunities that will emerge in this new economic regime. “Resources are currently being invested in major economic forces, such as artificial intelligence or deglobalization, which generate winners and losers,” he said.

The bet on the real economy is reflected in the opportunities the firm sees in data centers for artificial intelligence, “which will grow between 60% and 100% in the coming years”; also in the energy transition, with needs amounting to $3.5 trillion, and the reconfiguration of supply chains. “The real economy is gaining ground over the financial economy, benefiting infrastructure and industry,” the expert noted.

Risk, according to García Díaz, should be “tactical,” and it’s a good time to invest, characterized by below-trend growth, above-average inflation data, high debt, and elevated interest rates.

The equity positioning – an asset that has been performing well this year due to technology and good corporate earnings – focuses on Japan, artificial intelligence, quality companies, emerging markets – albeit selectively – and, tentatively, Europe.

1. Japan: The country is favored, according to the BlackRock expert, by a more favorable monetary policy, an economic recovery, healthy inflation, and structural reforms for shareholders and investors. “We advise allocating 10% of the total portfolio to Japan,” said García Díaz.

2. Artificial Intelligence: “We continue to overweight this sector and increase our conviction,” said the expert, who relies on the strong profits of these companies. “We believe we are still in a very early stage of AI; tech companies are investing heavily, and in future phases, telecommunications, healthcare, and finance will incorporate AI into their development, eventually permeating the real economy,” he assured. García Díaz revealed that AI will add 1.5 percentage points per year to the US GDP in the future.

Opportunities in this sector, according to the expert, are in data protection and cybersecurity; infrastructure such as data centers, semiconductors, and cooling; and finally, energy, due to the high consumption of this technology.

However, he also disclosed risks such as the capacity of the electrical grid to meet energy demand; regulation, or potential bottlenecks in the supply and production of metals necessary for artificial intelligence, like copper.

3. Quality Companies: Companies with healthy balance sheets and investment capacity are BlackRock’s main targets. These are abundant, according to the firm, in technology and the luxury sector.

4. Emerging Markets: The position García Díaz advises in emerging markets is “selective,” with India as the main protagonist, following the recent elections won by President Narendra Modi. “There has been volatility in the Indian market, but we value its young population; there is strong investment in supply chains, and there is a flow of equity ETFs into the country,” he said. His bet on India includes not only the stock market but also the country’s fixed income.

5. Europe: The firm’s positioning in Europe is still “tentative.” In this region, there are notable aspects, according to García Díaz, such as a better situation in the banking sector; the automotive industry weighs less in the indexes than in the past, and international companies are now better. “We are cautiously optimistic: we prefer banks, healthcare, and luxury in Europe,” the expert affirmed.

In fixed income, the firm overweights US short-term bonds and is increasing duration in European fixed income, considering that the ECB has already lowered interest rates and that inflation in the US remains elevated. The positioning is neutral in credit – both investment grade and high yield – while being selective with emerging markets, again favoring India as the preferred market.

Alternative markets are another of BlackRock’s bets due to the strong expected growth: in the coming years, assets will double. This growth, according to the expert, would come from easier access to such assets through products like Eltifs, technological improvements, and the progressive reduction of listed companies – since 2009, there are 20% fewer companies on global stock exchanges. “It’s a clear bet, as demonstrated by BlackRock’s last two corporate acquisitions: the GIP investment fund and the private markets data provider Preqin.”

The SEC Approves the MIAX Sapphire Exchange Platform

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Miami International Holdings (MIH) announced that the SEC has approved the application for MIAX Sapphire as a national securities exchange.

MIAX Sapphire will be MIAX’s fourth national stock exchange for listed options in multiple U.S. markets and will operate both an electronic exchange and a physical trading floor.

The electronic exchange is expected to launch on August 12, 2024, and the physical trading floor is set to open in 2025, according to the firm’s statement.

The MIAX Sapphire trading floor will be the first national stock exchange to establish operations in Miami, Florida, and will include a state-of-the-art trading floor, additional office space for MIAX employees and market participants, conference facilities, and media space.

“The launch of MIAX Sapphire provides our members, liquidity providers, and market makers with a new exchange designed to meet their evolving demands for better access to options liquidity,” said Thomas P. Gallagher, Chairman and CEO of MIH.

This system “also offers our market participants access to 100% of the listed options market in multiple markets, all supported by our proprietary technology designed to enhance liquidity and promote better price discovery,” he added.

MIAX Sapphire will utilize Taker-Maker pricing and a Price-Time allocation model while leveraging existing MIAX-based technology and infrastructure, allowing current MIAX Exchange members to access the new exchange with minimal additional technological effort, the firm explains.

H.I.G. Capital Adds Whitney Ehrlich as New Head of Private Wealth Management

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H.I.G. Capital announced that Whitney Ehrlich has joined the firm as Head of Private Wealth Management for the U.S. in its Capital Formation Group.

Ehrlich has over 20 years of experience in the high-net-worth private wealth sector and previously served as Managing Director and Head of the U.S. Family Office Business at BlackRock.

At H.I.G., Ehrlich will be responsible for capital raising activities and investor relations within intermediary and private wealth channels in the U.S., through the firm’s strategies.

“We are delighted to welcome Whitney to H.I.G. and the Capital Formation team. Whitney’s extensive experience and long track record in the private wealth markets will be crucial in further expanding our presence in this important segment,” commented Jordan Peer Griffin, Executive Managing Director and Global Head of Capital Formation for the firm.

Peer Griffin added that H.I.G. has consistently benefited from a diverse, global, and long-standing base of limited partners, including private wealth intermediaries and high-net-worth investors.

“We look forward to deepening and expanding these relationships and offering attractive alternative investment opportunities in the less efficient middle market,” he concluded.

H.I.G. is a global alternative investment firm with $64 billion in AUMs.

Venture Capital Investment Grew by 16% in the First Quarter Due to the Funding Needs of AI Companies

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The latest study by Bain & Company reveals that venture capital investment reached $89 billion globally (spread across more than 4,600 transactions) during the first quarter of 2024, representing a 16% increase compared to the last quarter of 2023. The consulting firm notes that generative artificial intelligence (AI) continues to dominate the venture capital landscape, given that large language models have a high need for funding.

According to the report, the United States led this growth, with a 72% increase compared to the previous quarter, driven by investments in technology, AI, energy, and healthcare. China also recorded a quarter-on-quarter increase of 13%, mainly due to the automotive and AI sectors. In contrast, Europe experienced a 28% decline in funding due to macroeconomic uncertainty and the technical recession in the United Kingdom.

The average size of venture capital deals increased across all funding stages. Early-stage investments grew by 43%, while seed-stage deals rose by 17%. In late-stage deals, the increase was 21%. Bain & Company particularly highlights the growth of Series B stage deals – when companies seek to expand their market reach – driven by sectors such as AI, renewable energy, and healthcare.

Additionally, the study indicates that while the number of Corporate Venture Capital investors remained stable, the deals funded by these investment vehicles increased significantly in the first quarter of 2024. This growth was particularly notable in the early-stage and seed stages, especially in sectors like energy, AI, and healthcare.

Alvaro Pires, partner at Bain & Company, adds: “More and more non-tech private equity firms are joining the generative AI trend. LG Technology Ventures, CVS Health Ventures, and Capital One Ventures led this activity globally in the past year. Moreover, we have observed significant growth in the collaborations these companies establish with some startups to incorporate generative AI into their customer experience.”

Harris vs Trump: What Does the Market Expect?

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The resignation of U.S. President Joe Biden from seeking re-election has further increased uncertainty in an already tumultuous geopolitical landscape for this year. Therefore, it is important to know the opinions of market leaders on how they expect the path to the national elections to unfold.

Although Vice President Kamala Harris’s candidacy is not fully confirmed, considering that the Democratic convention will be held in mid-August, the politician who has already received support from President Biden seems to be the favorite.

In the improvised selection of candidates that has emerged following Biden’s resignation, Harris is the betting favorite and has gained support from her party members in the last 24 hours. For example, at least 20 governors, 41 senators, and 181 representatives have endorsed Harris, according to a count by the New York Times, and the local press highlights over $81 million in donations for her campaign.

The market eagerly awaits the decision and the first polls on how these changes might affect former President Donald Trump, currently the betting favorite to win.

According to Ray Grenier, CEO of Bolton Global Capital, the Democrats have a better chance of winning with Harris. The head of the independent advisory network noted that with Biden, the chances of winning were very low “due to his evident decline in mental capabilities.”

In that regard, the executive commented that a potential Democratic victory with Harris at the helm—whom he believes has a high chance of being the candidate—would impact the markets in areas such as the expiration of the tax cuts implemented by Trump, the continuation of the green political agenda, and a bias towards increased regulation.

On the other hand, Biden’s resignation could boost former President Trump’s standing in the polls and benefit market sectors that have been anticipating higher chances of a Republican sweep in November, such as the financial and energy sectors, said Saira Malik, CIO of Nuveen.

If the opposite occurs, it could benefit more globally focused areas. In any case, “we expect greater short-term volatility due to this political uncertainty. One thing seems certain: there will be more twists and turns on the political roller coaster in the coming months,” she opined.

Additionally, the wave of weaker-than-expected economic data last week, following the release of lower-than-forecast CPI inflation for June the previous week, increases the likelihood of a rate cut by the Fed, the CIO of the asset manager added.

Portfolio Considerations

With heightened expectations of an early start to the Fed’s rate-cutting cycle, now seems like an especially opportune time to consider extending the portfolio’s duration by shifting some assets from short-term bonds and cash, complemented by allocations to diversified credit exposure, recommends Malik.

This could help investors reduce reinvestment risk, increase income potential, and provide a cushion against rate volatility. And with real yields—nominal yields minus taxes and inflation—in cash equivalents, investors might find sectors offering real yields and total return potential much more attractive than cash if U.S. Treasury yields decrease from here, as we forecast, concludes the Nuveen report.

Flexibility, Costs, and Above All, Innovation: The Weapons of ETFs to Gain Weight in Portfolios

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The advance of the ETF industry seems unstoppable. Increasingly, these products are detaching from the traditional conception of passive investment and are being considered management instruments with growing weight due to their efficiency. The question is whether, as an investment vehicle and thanks to their constant innovations and evolutions – including actively managed ETFs – they will ultimately displace traditional mutual funds in portfolios.

At the recent IMPower Incorporating Fund Forum held in Monte Carlo (Monaco), several experts shared their perspectives and participated in a debate analyzing the growth of ETFs and their potential and innovations. During a breakfast at the forum, Deborah Fuhr, Managing Partner and Co-founder of ETFGI, highlighted the multiple benefits of ETFs and their broad asset coverage, which has led them to reach record assets close to $13 trillion. Therefore, it is an industry to watch closely, analyzing its evolutions and opportunities.

Their acceleration has been enormous, partly supported by their flexibility and their advancement beyond pure passive investment: “They can also be active instruments. We have realized that ETFs are a very useful, extremely transparent, and flexible wrapper. Since their inception, ETFs have evolved from a market-capitalization-based vehicle to a very flexible one, and that is one of the reasons for their explosion. And, from a distribution standpoint, it is also seen much more simply than 10 years ago,” added Howie Li, Global Head and ETFs LGIM.

The Retail Investor’s Bet

“The ETF is a very transparent and efficient vehicle, ideal for making investment decisions and accessing different trends (AI, megatrends, sustainability, digital assets…), which explains its growth and adoption first by institutional investors and now by retail investors,” said Marie Dzanis, Former CEO, EMEA, Veteran CEO.

In fact, this is one of the major changes explaining their success: the adoption by retail investors, especially in the U.S., also due to the tax benefits in the country, but it is also happening in Europe, particularly in markets like Germany or the United Kingdom. “Retail investors are used to buying individual stocks, and that buying experience can extend to the purchase of a fund, which attracts the retail sector,” added Li.

Innovation and Actively Managed ETFs

This growing appetite has also led firms to move into a space they were not in a few years ago. “Many firms are entering the ETF industry, and one way to do this is by converting mutual funds into ETFs with index structures,” recalled Fuhr.

The development of proprietary indices to follow, or new active management structures based on indices, within an ETF wrapper – more transparent and cost-effective – is driving the ETF industry’s growth to unprecedented levels and reviving the debate not just between active and passive investment but about the best instrument for portfolios.

“The debate has gone beyond active versus passive management and is now focused on ETFs versus other investment vehicles,” said Philippe Uzan, Deputy CEO – CIO Asset Management at iM Global Partner.

“I would separate ETFs from the active vs. passive investment debate: ETFs are the result of industry innovation, the most efficient instrument for investing, for institutional and individual investors. If I have to choose between active or passive investment, it will all depend on the market context,” said Mussie Kidane, CIO, North America Advisors at Pictet.

The expert went further, noting that “in the United States, actively managed ETFs are leading market innovation and development, offering immediacy, transparency, and tax advantages. A traditional fund investor has to pay, but ETFs offer near-zero fees, and this is changing the industry’s playing field.” In his view, traditional funds represent a “dying industry in the U.S. while many investments are being built in ETF format” due to their efficiency. The expert argued that when there is a highly efficient instrument, supported by innovation, it can “kill” other instruments: “The amount of innovation happening in the U.S. in the world of ETFs is incredible,” he continued.

Controversial statements not all experts agreed with, especially professionals working on the European side: “I agree that ETFs have advantages in the U.S. that do not exist in Europe, but if they arrive, they could be a preferred instrument,” said Uzan. However, in his opinion, “the fund industry is changing, not dying. Those who do not change are the ones who die,” he defended.

Sustainability and Crypto

Debates at the forum also touched on ETFs as a way to access sustainable investments: “The issue of sustainability is stronger in Europe than in the U.S., but it cannot be denied. We have moved from an exclusion perspective to looking at companies’ behavior metrics and seeking ESG leaders, but in recent months, the focus has been on how this will work from a transition perspective, and the industry has realized it will take years and that the role of traditional companies cannot be denied. It will be acknowledged, and sustainable solutions will evolve,” commented Li.

Another significant innovation in this industry is ETFs that provide access to digital assets and cryptocurrencies through “solid and regulated structures.” Experts recalled that the launch of the first spot bitcoin ETF was the most successful in history.

Fixed Income Catch-up

The innovation in the ETF world is undeniable, but there are also advances regarding traditional assets: Tim Edwards, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices (S&P DJI), provided a statistic: the majority of indexed funds are still in the equity space, and the total amount of equity worldwide invested through indices is about 20%, compared to 2% for fixed income. However, fixed income indexed vehicles are growing faster, he noted.

Uzan highlighted the difficulties managers have in beating the indices and yet defended that “fixed income is still a great territory for active management.” In his opinion, one of the keys for active managers is not to stick to or restrict themselves to a single investment category but to look at the entire investment universe. For other experts, vehicles that replicate indices have value in the most liquid areas of the asset, such as government or investment-grade corporate debt, while active management can apply to other segments of this market.

Is This Portfolio Rebalancing Movement Sustainable?

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The attempted assassination of Donald Trump increased his lead over Joe Biden by 7 points (from 60 last Saturday to 67 today) according to betting houses. In the average polls compiled by RealClearPolitics, it has remained much more stable, rising from 47.2 to 47.4.

Although gauging the impact that the assassination attempt may have at the polls next November is mostly a matter of speculation, there is a clear effect on sentiment reflected in the bets of Americans (PredictIt, Polymarket), consistent with historical precedents such as the attacks suffered by Teddy Roosevelt in 1912 or Ronald Reagan in March 1981, which were not very long-lasting.

The adjustment of perspectives at the political level and in the macroeconomic sphere following the digestion of macro data, which point to a reasonable moderation in the pace of expansion (confirmed by the surprising retail sales figures) and the return of the disinflationary trend in price indices, are justifying a repositioning of institutional investors’ portfolios. Gold has hit a new high, the yield curve has steepened, and stock market bets are being reassigned.

With uncertainty in the geopolitical and international trade spheres on the rise and the monetary policy cycle declining, the rotation from megacap companies to small and mid-cap companies has gained momentum in recent sessions, as demonstrated by the 12% lead of the Russell 2000 over the Nasdaq in the last five days. This is a mark not seen since April 2001 (against the S&P 500, the movement has no historical precedent) and leaves the technology and communication services sectors trailing in terms of profitability in a global context.

These price movements show that investors support the idea that interest rate cuts, which could be larger than the market anticipates, will sustain this cycle for a little longer to the benefit of companies that have suffered the most from the 2022-2023 monetary tightening cycle.

However, to confirm this thesis, we will need to see not only a turning point in monetary policy (U.S. small caps are ~3x more leveraged in Debt/EBITDA than large companies and more dependent on variable-rate bank loans) but also a recovery in EPS, which is not assured if, as we think, the cycle is more likely to be ending than extending.

The publication of second-quarter results will provide information in this regard, but as we see in the chart and according to SME surveys, it is unlikely that high-yield credit spreads will support the excessive price increases of the past few sessions for much longer.

Behind the momentum in small-cap prices, we find the hot money of retail investors who have rushed en masse to buy ETFs and the gamma short positions of traders. As we can see in the table, and consistent with what we explained above, in the last 5 days there have been net purchases worth more than $4 billion in the Russell 2000 ETF and notable increases in other ETFs associated with a recovery in economic activity (industrials, financials), gold, and the equal-weight S&P 500 ETF, which dilutes the influence of tech megacaps.

In summary, an excessive gap between large-cap indices (S&P 500 and Nasdaq) and small-cap indices (S&P 600, Russell 2000, Russell 2500), in the context of June macro data supporting the soft landing scenario (employment, retail sales, industrial production, inflation), has led to a shift in the rhetoric of several Fed members and investors’ perceptions of interest rate trends (adding a -0.25% adjustment to their expectations from a week ago, moving the first cut from November to September).

The coincidence, moreover, with the increased likelihood of a “red wave” in the November presidential elections and Trump’s choice of a vice president who will not discomfort him at all, has led U.S. fund managers and retail investors to rush to buy cyclical/value/small-cap stocks while unloading what has risen the most (growth/semis/AI).

The question is: Is this portfolio rebalancing movement sustainable? Given the uncertainty about which scenario will prevail in 8-12 months (with a higher probability for a slowdown/mild recession than for a soft landing in our opinion), it is difficult to make a forecast with conviction.

The retail sales figure, which posted the strongest rise in three months in June, one of the catalysts for what happened this week, seems actually taken out of context: the inertia in EPS and sales revisions for consumer companies (Nike, Pepsi, Delta, Chipotle, Starbucks) in the U.S. has accumulated 10 consecutive weeks of downward adjustments. We recently commented in this column on how lower-income households have been more concerned about their finances and are concentrating their spending on essentials and moving towards store brands.

The savings rate as a percentage of disposable income is below 4%, and credit card and consumer loan delinquencies have skyrocketed. Similarly, according to the U.S. Consumer Behavior Study compiled monthly by Bank of America, credit card spending contracted by 0.5% in June, and the series has shown a negative trend since February. Additionally, the labor market will continue to cool in the coming months.

The update of the “Beige Book,” which at first glance supports the soft landing scenario (less inflation, growth moderation), also provides a perspective that contrasts with the retail sales data.

Of the 12 Fed districts participating in the compilation of the Summary of Current Economic Conditions (or Beige Book), 5 point to flat or declining activity this time: three more than in the previous report. The report also shows moderation in labor demand and more selective hiring by employers. And, in line with our comments and the Bank of America document’s conclusions, most districts report an increase in discount campaigns by retailers in response to more price-sensitive consumers, focusing mainly on essential goods and willing to buy lower-quality but cheaper products.

Regarding the Fed’s plans, it is very likely that cuts will begin in September (the market assigns a 95.5% probability). The yield curve is steepening, which is implicitly favorable for value themes, cyclical bets, and small businesses. The trend towards the 2% inflation target will become more evident as service prices continue to moderate and the housing cost components of CPI/PCE more clearly reflect the decline in rental costs in the market.

There could even be a positive surprise in the amount of cuts by the end of the year (3 instead of 2?), but this would come with a more pronounced deterioration in the labor market, negatively affecting credit and therefore harming small caps. Moreover, if history is a guide, the bullish momentum of these types of stocks following Trump’s unexpected victory in 2016 did not take long to deflate.

As for Trump’s return to the White House, it is the most likely bet, but things can happen between now and November. The announcement of Joe Biden’s departure (and his replacement on the ticket by Kamala Harris, accompanied by Ray Cooper, Mark Kelly, or Andy Beshear as vice-presidential candidate) could happen in a matter of days, following the sharp turn in the polls after the debate and the fundraising collapse on the Democratic side.

Clearly showing this, polls give Trump a two-point lead in Virginia, a traditionally Democratic stronghold that Biden easily won in 2016 (+10 points). With Biden’s departure, undecided Democrats about his ability to lead the country for another four years could support another candidacy, diluting the potential for large Republican majorities in the House and Senate.

And regarding the betting advantage, it has almost vanished (from 69 to 62), in line with what happened in 1981 after the attempted assassination of Ronald Reagan (3/30/1981).

Although Trump would still be the favorite, it is possible that the market is exaggerating the benefits a new mandate would bring to investors. Trump has learned in the past four years that inflationary policies have severely damaged his opponent’s image. Additionally, his 2016 victory was a surprise, whereas it is now partially priced in.

Then, the prospects of rising inflation were one of the main causes of the “bear steepening,” which would initially favor portfolio repositioning; this time, the cycle is much more mature, and disinflation prevails. Finally, the room for fiscal aggression is significantly reduced: debt-to-GDP is at 99% (76% in 2016), and interest payments on GDP are almost triple (3.1% vs. 1.4%).

Extending the 2016 TCJA tax cuts will have a lower fiscal multiplier than Biden’s expansive plans (IRA, CHIPs, infrastructure). If he manages to impose his project of a 10% tariff increase on imported goods, it will initially

drive up inflation and benefit domestic demand (small caps), but it will eventually be a deflationary measure.

Despite everything, for those looking to jump on the small business bandwagon, it is important to note the differences between the indices: S&P 600 offers more quality, while Russell 2000 has more dynamite.