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The State of Inflation-Linked Bonds in a Post-COVID-19 Environment

Jana Vukomanovic Water Unsplash — Pixabay CC0 Public DomainJana Vukomanovic. Jana Vukomanovic

As global markets attempt to recover their poise in the relentless shadow of COVID-19, one hot topic has perhaps challenged economists more than any other: What will be the pandemic’s effect on inflation? We believe the inflation rate will be between zero and 1%, and this is already priced in the market. But the picture for 2021 is only now starting to clear, presenting a new landscape of opportunities for investors in the inflation-linked bond market.

Many experts predicted the global coronavirus lockdown would be disinflationary – and they were right. The fall in activity did have a clear effect on prices for a variety of reasons. At AXA IM, we now forecast 2020 inflation to average 0.4% in the Eurozone, 1.0% in the US and 0.7% (1) in the UK – rising to 0.7%, 1.4% and 1.5% respectively for 2021. The impact, however, has not been a one-way street – we are already starting to see signs of higher pricing in some sectors which could suggest market expectations are too low.

One factor that has served to depress core inflation has been the inclusion of more online pricing into the data, an understandable measure given the impact of the lockdown on consumer behavior. However, we believe several other factors are having the opposite effect. Food prices, for example, have tended to climb during this period, as have telecoms prices after a long period of decline.

Hidden effects

In some areas we are still assessing the longer-term trend, although there does appear to be some evidence that education and health prices could continue to rise, alongside some localized trends in leisure and tourism services where consumers are no longer travelling to cheaper destinations. Inflation surveys could have a difficult job adapting to new realities in consumption patterns.

More fundamentally, there is evidence that the post-lockdown response from consumers has pushed some economies towards a more aggressive rebound than had been feared, accompanied by a parallel rise in prices. Figure 1 below shows that recent inflation numbers in the US have been the most solid seen in years, and that the rebound has been broad-based. In addition, as we move into 2021, inflation numbers worldwide will reflect a negative base effect from oil prices, which slumped as the pandemic spread.

AXA IM

From a more macro perspective, we see a medium-term risk that the COVID-19 outbreak could exacerbate tensions in the current model of globalization. Pre-pandemic – alongside US President Donald Trump’s ‘America First’ approach to trade – there had already been a shift towards a more protectionist tone in global markets. Now the virus has forced countries and businesses to re-assess the flow of goods, services and people across borders.

Hedging into view

These observations mean we believe there is a general risk to the upside for inflation as we move into 2021. And it is a risk that we believe has not been adequately reflected in market expectations.

One way to gauge how markets expect inflation trends to evolve is to look at inflation swaps. The chart below (Figure 2) shows that realized inflation since June is consistent with the top-end outlooks for inflation. The inflation swap market, however, is still pricing in the lower end, particularly in Europe but also to some extent in the US. Our expectation is for a potential aggressive rebound of inflation at the beginning of 2021, and we believe investors should consider preparing for that eventuality.

AXA IM

Naturally, these factors to the upside are encouraging more investors to explore ways they can hedge inflation risk and is having a tangible impact on the inflation bonds market, already underpinned by active monetary policy and supportive fiscal policy. Consumer behavior, the rise of protectionism and the possibility of regulatory price effects (for example through green policies) will be central to the potential uptick in prices – but central banks will also do what they can to push inflation higher from this point.

Column written by Jonathan Baltora, Head of Sovereign, Inflation and FX – Core at AXA IM.

To learn more about this topic, please contact Rafael Tovar, Director of Wholesale/US Offshore Distribution, AXA IM at Rafael.Tovar@axa-im.com.

Notes:

[1] AXA IM estimates as of September 2020

Disclaimer:

For Institutional/Qualified Investors and Wholesale/Professional Clients only, as defined by applicable laws and regulation. Not to be relied upon by retail clients. This communication is provided for informational purposes only.

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Investing involves risk and past performance does not guarantee future results. Fixed income securities are subject to interest rate risk, credit risk, prepayment risk and market risk. High yield and investment grade securities are subject to a greater risk of capital loss, credit risk, and default risk and liquidity risk. Investors in offshore vehicles advised or sub-advised, in whole or in part, by the Adviser employing the investment strategy described herein may be subject to currency exchange risk. There is no guarantee that the objectives of the investment strategy described herein will be achieved.

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The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.

This communication is issued in the US by AXA Investment Managers, Inc., which is registered in the US with the Securities and Exchange Commission. The information contained herein may not be reproduced or transmitted, in whole or in part, by any means, to third parties without the prior consent of the AXA Investment Managers, Inc. © 2020 AXA Investment Managers, Inc. All rights reserved.

Lombard International Expands its Institutional Solutions Practice

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architecture-2256489_1920 — Pixabay CC0 Public Domain. El coste de riesgo de la banca casi triplica los niveles anteriores a la pandemia

Lombard International Group announced the expansion of its Institutional Solutions Practice (Practice) globally. This will provide institutional investors, based across the globe, with more effective ways to invest in U.S. private markets. Also, “it will assist U.S. and non-U.S. investment managers to raise capital through compliant investment structures that can more efficiently enhance net returns”, stated the firm in a press release.

The Practice focuses on improving global access to U.S. private markets for institutional investors such as pension funds, corporations, sovereign wealth funds, foundations, endowments and funds of funds, to enable their investment allocation to be “more efficient and effective”, says the wealth manager.

Operating across major global wealth hubs, the Practice is headed up by financial services veteran John Fischer, who leads a multi-disciplined team of senior executives. In the U.S., this includes Tom Wiese, Executive Managing Director; Sandy Geyelin, Executive Managing Director, and C. Penn Redpath, Senior Managing Director. Also, Jason Tsui, Managing Director, will lead the distribution strategy in Asia; Juan Job, Senior Managing Director, will be in charge of Latin American operations; and EMEA will be led by Peter Coates, who recently joined Lombard International as Global Director of Institutional Solutions.

“Institutional Solutions has been one of the key drivers of our growth. We’re excited to launch this internationally expanded Practice across the major global wealth hubs in Asia, Europe, LatAm and the U.S. Our team’s many decades of experience in combining insurance solutions and investment for optimized outcomes, as well as their subject matter expertise in alternative investments, means they are perfectly positioned to assist strategic partners and clients focused on U.S. private markets, which present attractive investment opportunities”, said Stuart Parkinson, Group Chief Executive Officer.

Michael Gordon, US CEO & Global COO, commented that, as markets remain volatile and uncertain, the institutional appetite for U.S. private markets is increasing. “Despite recent events, financial markets remain globally connected, and non-U.S. institutional investors in particular continue to be a key driver of asset flows into U.S. private equity, private debt and real assets. I’m delighted to spearhead the growth of this practice globally, to help institutions better achieve their unique investment objectives”, he added.

Meanwhile, Fischer, Executive Vice President and Head of Distribution, pointed out that their aim with this internationally expanded Practice is to truly make every basis point count. “We have created an effective global offering, using time-tested insurance structures which help investors reduce the friction associated with U.S. private assets, improving investment yields and reducing administrative burdens. Importantly, our solutions are cost-efficient, transparent and highly customizable to the unique needs of institutional investors”, he said.

Morgan Stanley to Acquire Eaton Vance for $7 Billion

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Morgan Stanley has entered a definitive agreement to acquire Eaton Vance, a provider of advanced investment strategies and wealth management solutions with over $500 billion in assets under management (AUM), for an equity value of approximately $7 billion.

The acquisition will make Morgan Stanley Investment Management (MSIM) a leading asset manager with approximately $1.2 trillion of AUM and over $5 billion of combined revenues. The asset manager stated in a press release that it avances its “strategic transformation” with three world-class businesses of scale: Institutional Securities, Wealth Management and Investment Management.

MSIM and Eaton Vance consider themselves “highly complementary” with limited overlap in investment and distribution capabilities. Eaton Vance is a market leader in key secular growth areas, including in individual separate accounts, customized investment solutions through Parametric, and responsible ESG investing through Calvert. “Eaton Vance fills product gaps and delivers quality scale to the MSIM franchise. The combination will also enhance client opportunities, by bringing Eaton Vance’s leading U.S. retail distribution together with MSIM’s international distribution”, points out the press release.

“Eaton Vance is a perfect fit for Morgan Stanley. This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise. With the addition of Eaton Vance, Morgan Stanley will oversee $4.4 trillion of client assets and AUM across its Wealth Management and Investment Management segments”, said James P. Gorman, Chairman and Chief Executive Officer of Morgan Stanley.

Meanwhile, Thomas E. Faust, Jr., Chief Executive Officer of Eaton Vance stated that by joining Morgan Stanley, they will be able to further accelerate their growth by building upon their common values and strengths, which are focused on investment excellence, innovation and client service. “Bringing Eaton Vance’s leading brands and capabilities under Morgan Stanley creates a uniquely powerful set of investment solutions to serve both institutional and retail clients in the U.S. and internationally”, he added.

The details of the transaction

The firms point out that this transaction is attractive for shareholders and will deliver long-term financial benefits. “Both companies have demonstrated industry-leading organic growth and have strong cultural alignment”.

The combination will better position Morgan Stanley to generate attractive financial returns through increased scale, improved distribution, cost savings of $150MM – or 4% of MSIM and Eaton Vance expenses – and revenue opportunities.

Under the terms of the merger agreement, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock, representing a total consideration of approximately $56.50 per share. Based on the $56.50 per share, the aggregate consideration paid to holders of Eaton Vance’s common stock will consist of approximately 50% cash and 50% Morgan Stanley common stock.

The merger agreement also contains an election procedure allowing each Eaton Vance shareholder to seek all cash or all stock, subject to a proration and adjustment mechanism. In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance to Eaton Vance common shareholders from existing balance sheet resources.

The transaction will not be taxable to Eaton Vance shareholders to the extent that they receive Morgan Stanley common stock as consideration. The transaction has been approved by the voting trust that holds all of the voting common stock of Eaton Vance, says the press release.

The acquisition is subject to customary closing conditions, and is expected to close in the second quarter of 2021.

iShares Launches the First Climate Risk-Adjusted Government Bond ETF

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ireland-1971997_1920 — Pixabay CC0 Public Domain. iShare amplía sus fondos sostenibles con el lanzamiento de un ETF UCITS de bonos climáticos

iShares has launched the first climate risk-adjusted government bond ETF in the market: the iShares € Govt Bond Climate UCITS ETF. The strategy tracks the FTSE Climate Risk-Adjusted European Monetary Union (EMU) Government Bond Index (Climate EGBI), launched by FTSE Russel last January.

The ETF offers access to Eurozone government bonds while seeking to provide a higher exposure to countries less exposed to climate change risks and a lower exposure to countries that are more exposed, explained FTSE Russel on a press release. As for the index, it is designed for investors with an increased focus on climate performance of their government bond portfolios and is the result of close collaboration with Blackrock’s team over recent months.

The Climate EGBI incorporates a tilting methodology that adjusts index weights according to each country’s relative exposure to climate risk, with respect to resilience and preparedness to the risks of climate change. This includes an assessment of the expected economic impact of transitioning to greenhouse gas emissions levels aligned with the Paris Accord target of less than 2°C by 2050, known as transition risk. An assessment of the physical risk of climate change such as sea level rises and the resiliency of countries to tackle these risks is also assessed.

“The decision by a leading investor and ETF provider such as Blackrock to license FTSE Russell’s Advanced Climate EGBI for an ETF listing marks an important juncture in climate themed investing in European fixed income markets. Both institutional and private asset owners are increasingly including climate objectives in their decision making and are adjusting fixed income portfolios based on climate concerns. We expect growing interest from investors in this area”, said Arne Staal, Global Head of Research and Product Management at FTSE Russell.

Meanwhile, Brett Olson, Head of iShares fixed income, EMEA, at BlackRock, pointed out that sovereign issuers are facing increasing pressure to meet sustainability criteria, as more investors consider the ESG profile of their fixed income portfolios. “Until today, investors have had very limited options for cost effective exposure to government bonds that incorporate climate risk. This launch is yet another example of our commitment to providing investors with more choice to build sustainable portfolios”, he added.

Stefano Caleffi Named New Head of ETF Sales for Southern Europe at HSBC Global AM

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HSBC Global Asset Management has expanded its ETF sales team with the appointment of Stefano Caleffi as Head of ETF Sales for Southern Europe, a newly created role.

Based in Milan, he will be responsible for driving HSBC Global AM’s ETF sales and business development efforts across Italy, Spain and Portugal. Caleffi will report to Olga de Tapia, Global Head of ETF Sales.

The asset manager announced in a press release that this appointment follows the ones of Phillip Knueppel as Head of ETF Sales for Austria, Germany and Switzerland and Marc Hall as Head of ETF Sales for Switzerland.

De Tapia commented that Caleffi’s appointment is another milestone in their plans to grow their ETF business in Europe. “His extensive client-facing and ETF industry experience make him the perfect candidate to drive our sales effort in Italy, Spain and Portugal”, she added.

Caleffi has over 15 years’ experience in the investment management industry. Most recently, he was Head of ETF Business Development Italy, Iberia and Israel at Invesco. Prior to that, he was responsible for Southern Europe distribution at Source. Before joining Source, he worked in the equities division of Credit Suisse First Boston.

Calvert Research and Management Launches the Calvert Institute for Responsible Investing

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dandelion-463928_1920 — Pixabay CC0 Public Domain. still pandemia

Calvert Research and Management, a subsidiary of Eaton Vance, announced the launch of the Calvert Institute for Responsible Investing, an affiliated research institute dedicated to driving positive change by advancing understanding and promoting best practices in responsible investing.

Initially launched in North America, asset owners and investors in Europe and Asia will now have access to Calvert Institute’s work by connection to its online hub hosting its latest research as well as dedicated client events and webinars. “Through research, education and collective action, the Calvert Institute seeks to direct the power of the financial markets increasingly to addressing the leading global challenges of our time, including environmental degradation, climate change, racial inequality and social injustice”, said the firm in a press release.

As a complement to its internal research and education programs, the institute will partner with academic organizations, industry groups and other like-minded investors to create and sponsor third-party research focused on environmental, social and governance (ESG) issues of concern to responsible investors.

“For many years, Calvert has been a global leader in responsible investing and a catalyst for positive change through our research and engagement efforts. By creating the Calvert Institute, we broaden the scope of our mission and programs in support of responsible investors and society as a whole”, commented John Streur, President and Chief Executive Officer.

Meanwhile, Anne Matusewicz, a director of the Calvert Institute, said that they are “thrilled” to have this opportunity to contribute to the further development of responsible investing. “We want to help investors understand the role they can play in promoting positive change. Examining race and injustice, climate change and other critical issues will allow us to amplify voices that challenge the status quo based on research results and educate individuals and institutions at various stages of their responsible investment journey”, she added.

The Calvert Institute will continue Calvert’s well-established practice of working with leading academic professionals and supporting innovative research done at academic institutions, governance organizations and specialist research firms. Current research projects include exploring and assessing forms of corporate governance, human capital management, inequality and the financial materiality of gender and racial diversity, ESG integration, public finance, sustainable practices and the global energy transition.

Mexican Pension Funds’ Diversification with Global Alternative Investments Continues

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Captura de pantalla 2020-10-06 a la(s) 6 — Photo:Pxhere CC0. Foto:

In the first nine months of the year, 7 GPs have issued 20 private equity vehicles that are listed on the two stock exchanges in Mexico (BMV and BIVA). In total, 3 CKDs have been issued that invest in Mexico in the infrastructure, private equity, and credit sectors; while 4 GPs have issued 17 CERPIs to invest globally in the fund of funds sector.

The capital committed to invest globally amounts to 1.924 million dollars (md), while the resources that will be invested in Mexico are 882 md to give a total of 2.806 million dollars that represent 9% of the 31.538 million dollars of committed capital of all CKDs and CERPIs. Since 2018, when global investments were allowed through CERPIs, the trend has been for global diversification, hence the predominant issuance of CERPIs rather than of CKDs. Of the committed Capital, the called capital represents 57% where the called capital of the CKDs dominates with respect to the CERPIs.

All these issues were made before September 7, the date on which CONSAR published changes to the regulation of the AFOREs through the so-called “Circular Unica Financiera” also known as CUF.

Regulatory changes seek for CKDs and CERPIs to incorporate elements that offer certainty in terms of risk management, investment, and governance policies and, above all, guarantee that this type of investment does not represent an excessive cost for workers. Therefore, these changes are expected to slow down the pace of issuances in the coming months.

A total of 25 CKDs and CERPIs have been identified in the pipeline.

From 2017 to September 30, 14 began their legal issuance process in 2019; 6 in 2020 and 5 between 2017 and 2018. In general, the issuance process takes two years and the exceptions are those that manage to leave within a year of starting their legal issuance process.
14 are doing their procedure at BIVA and 11 at the BMV.
9 are CERPIs and 16 CKDs.
10 are frequent issuers of CKDs and CERPIs and 15 are new.
There are 12 that want to issue in the real estate sector (4 CERPIs), 6 in private equity (4 CERPIs); 2 debt; 2 Infraestructure; 2 in other sectors and 1 fund of funds (CERPI).

The AFOREs have 201.089 million dollars of assets under management as of August 31, of which 11.804 million dollars are investments in CKDs, CERPIs and structured (5.9% of the portfolio). Currently, investments in CKDs represent 4.8% of assets under management and only 1.1% are investments in global alternatives (CERPIs). If called capital is considered, the percentages go to 6.7% in local investments (CKDs) and 4.8% in global investments (CERPIs) to represent 11.5% with the current value of assets under management.

The diversification sought by the AFOREs will lead to the continued growth of the issuance of CERPIs.

Column by Arturo Hanono

Prima AFP Becomes the First Pension Fund in Perú to Adopt the CFA Institute Asset Manager Code

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Renzo Ricci 2_0 — Foto cedidaRenzo Rici, CEO Prima AFP. Prima AFP se convierte en la primera AFP en Perú en adoptar el Código de Gestor de inversiones (AMC) de CFA Institute

CFA Institute, the global association of investment professionals, announces that Prima AFP has become the first pension fund in Perú to claim compliance with the CFA Institute Asset Manager Code™. Prima AFP is the pension fund manager of Credicorp Group, the largest financial services holding company in Perú. The adoption marks another important milestone for the Asset Manager Code in Latin America, with Prima AFP joining other major pension funds and asset managers across the region and around the world.

The Asset Manager Code clearly outlines the ethical and professional responsibilities of organizations that manage assets on behalf of their clients. For investors, the code provides a benchmark for the behavior that should be expected from asset managers and offers a higher level of confidence in the organizations that adopt the code.

Many organizations have their own conduct standards in place to guide their work, but it can be difficult for clients to compare different codes or understand the level of commitment toward protecting their interests. Clients can use the CFA Institute Asset Manager Code to identify organizations that commit to a common foundation of ethical principles.

“As the newly appointed Chair of the Board, I am pleased to see this exciting development in my home country of Perú,” said Daniel Gamba, CFA, Chair of the Board of Governors, CFA Institute. “The Asset Manager Code provides a common, globally recognized benchmark for pension funds to strive for and Prima AFP is leading the way. I look forward to seeing more adoptions by pension funds and other asset managers across the country and the region.”

“It is at the core of our mission to advance ethics, professional standards of practice, and market integrity in the investment management industry,” said Karyn Vincent, Senior Head, Global Industry Standards, CFA Institute. “We applaud Prima AFP, and all organizations that have adopted the code, for displaying a steadfast and tangible commitment to professional ethics and putting investors first. When we put investors at the heart of all we do, we can rebuild trust in the profession and benefit society at large.”

“Investors deserve the highest level of ethical and professional conduct from the firms and individuals with whom they trust their investments,” said Renzo Ricci, CEO of Prima AFP. “Adopting the Asset Manager Code is a demonstration of our commitment to our clients and a demonstration of how we protect their interests. We are proud to join the distinguished list of firms and pension funds worldwide that are committed to putting investor needs and interests first.”

The Asset Manager Code is grounded in the ethical principles of CFA Institute and the CFA® Program, and requires that managers commit to the following professional standards:

· To act in a professional and ethical manner at all times
· To act for the benefit of clients
· To act with independence and objectivity
· To act with skill, competence, and diligence
· To communicate with clients in a timely and accurate manner
· To uphold the rules governing capital markets

More than 1,000 firms worldwide claim compliance with the Code including Ariel Investments, BlackRock, Janus Capital Management, J.P. Morgan Asset Management, Afore XXI Banorte, BBVA Asset Management Mexico, Credicorp Capital Asset Management, Itaú Asset Management and Principal Afore.

Prima AFP has been Credicorp Group’s pension fund manager for the Peruvian market for 15 years. It currently manages the funds of 2.3 million people affiliated with the Private Pension System (SPP) of Perú, equivalent to 30.9% of the market. At the end of August, its portfolio was valued at more than 13 billion dollars

Alken Expands LatAm Presence Through Deal with AIS Financial Group

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puzzle-1261138_960_720 — Pixabay CC0 Public Domain. Alken expande su presencia en Latinoamérica gracias a la firma de un acuerdo con AIS Financial Group

The Alken Fund, managed by Alken AM, through its Luxembourg Manco, AFFM S.A. and Swiss AIS Financial Group, have announced the signing of a Strategic Agreement to benefit from AIS market presence in Latin America with the aim to expand the penetration of Alken funds in such region.

The deal will allow AIS Financial Group investor base to access a couple of Alken´s UCITS funds, including the Alken European Opportunities, managed by Nicolas Walewski and co-managed by Marc Festa, and the Alken Income Opportunities, managed by Antony Vallée and Robin Dunmall.

The Alken European Opportunities has a solid long track record in European Opportunities with a fundamental / bottom–up unconstrained, concentrated, low rotation approach. The Alken Income Opportunities invests in global corporate bonds, with a bottom-up approach including low-delta convertibles, straight bonds, hybrids, and any debt instrument issued by quoted companies. With a flexible breakdown High-Yield / Investment Grade, the fund aims to generate at least a 6% yield per annum.

AIS is an independent, client service oriented investment boutique, that provides advice on investment solutions with a special focus on structured products and funds. With this deal, AIS further strengthens its brand and reputation, enlarging its product and service offering.

All entities are enthusiastic for the opportunities this deal will entail, and look forward to a successful partnership.

Three Policy Differences for Investors to Watch in the US Presidential Race

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american-flag-790875_1920 — Pixabay CC0 Public Domain. Las tres diferencias políticas que los inversores deberían vigilar en la cerra presidencial de Estados Unidos

President Trump and former Vice President Biden have notably different views about corporate taxes, energy and US-China trade, which may have a substantial impact on markets and portfolios.

As the November 3 US presidential election draws closer, the race is tightening between both candidates. While much is at stake in this election cycle, the three policy areas noted below could have a large impact on the markets and portfolio allocations. Investors should plan to adjust portfolios depending on the direction of policy after Election Day though emerging technology and infrastructure may be winners regardless of the outcome.

1. Corporate tax policy

While Mr. Trump’s corporate tax policies are ostensibly more market-friendly, Mr. Biden’s plan may be offset by other growth initiatives. He wants to reverse the Trump administration’s 2017 tax cuts, raising the corporate tax rate from 21% to 28% (keeping it below the pre-2017 rate of 35%) and creating a minimum 15% tax for corporations earning $100 million or more. He also plans to double the tax rate for foreign subsidiaries of US firms.

These policies would likely hurt earnings for sectors that benefited the most from Mr. Trump’s tax cuts (including financials, consumer staples and utilities) as well as large multinational companies with overseas operations (including technology and healthcare). However, Mr. Biden does plan to invest in growth areas such as clean energy and 5G technology. Moreover, the US economy is recovering from recession, so Mr. Biden may not make tax hikes an immediate priority – and there is no guarantee they will pass, especially if Congress remains divided.

Mr. Trump wants to maintain the status quo. The corporate tax cuts he implemented in 2017 were designed to be permanent, and he also likely wants to turn the temporary tax cuts for individuals into permanent ones. However, much depends on which party controls the US Congress after the elections – a Democratic Congress would be much less receptive to Mr. Trump’s tax proposals.

2. Energy policy

A Biden presidency could create opportunities for clean energy, while another Trump term would support the existing energy regime. Mr. Biden plans to invest heavily in areas like renewable energy and climate protection. His policy calls for a $2 trillion investment in solar, wind and other clean-energy sources, as well as incentives for manufacturers to produce zero-emission electric vehicles and energy-efficient homes.

Mr. Trump’s plan focuses more on traditional energy sources such as oil, natural gas and coal – which account for over 80% of total energy used in the US (vs. 10% for renewable energy). He would provide a friendlier tax and regulatory regime for traditional energy, as well as continued support for fracking – a drilling technique use to extract oil or natural gas from underground. The Trump administration believes its energy policies have made the US less vulnerable to shocks from the Middle East or OPEC.

3. US-China trade policy

President Trump has made US-China trade a priority of his administration – often acting unilaterally or via executive order. The two countries did agree on a Phase 1 trade deal in January, but tensions have since resumed over the pandemic and the business practices of Chinese technology firms. In a second term, Mr. Trump would likely continue his tough rhetoric and unilateral approach, perhaps spurring market volatility in the years ahead.

Mr. Biden has also pledged to be “tough on China”, but has indicated he prefers building coalitions – bringing US allies, labor groups and environmental organizations to the negotiating table. His administration would likely also view Chinese-led technology firms less favorably; Mr. Biden proposes a $300 billion investment in US technology spending (including 5G, AI and cybersecurity) to remain competitive with the Chinese. President Trump would likely favor continued US leadership in technology as well, although he has not confirmed any new policy measures to support this.

Despite their many differences, Mr. Biden and Mr. Trump are aligned in some areas that markets may not appreciate. For example, both candidates support some form of lowering pharmaceutical drug prices, favor more regulation of certain large US tech firms and hope to pass substantial US infrastructure packages, supporting areas like smart cities, roads and airports.

Historically, markets have done worse in the weeks before Election Day than in the period from Election Day to yearend (see chart). This is likely because the markets don’t like uncertainty: once an election is over, the markets are able to start factoring in the next president’s policies.

At the same time, the COVID-19 pandemic makes this a very unusual election year for the markets. While the presidential candidates spar over how they would approach the pandemic, the markets are processing new data points about regional outbreaks, vaccines, drug therapies and the pace of economic recovery – in addition to the level of monetary and fiscal support that has provided a floor for markets so far.

If the global economy does rebound in the next 12–18 months, we expect to see broader sector and geographical participation in the market’s upside – beyond the large-cap US technology stocks that have led through the crisis. Investors may want to factor this in, along with the candidates’ proposals, to consider allocations to select sectors. Cyclicals (such as select industrials, energy and financials), emerging technology with long-term growth potential (such as 5G, AI and cybersecurity), infrastructure and clean energy may all be potential winners in a post-2020 US election era.

Column by Mona Mahajan, US investment strategist and director with Allianz Global Investors