Biden Gives Up for Reelection but Policy Proposals Will Remain Key, Experts Say

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The day starts digesting the big news of the weekend, Joe Biden’s withdrawal as a candidate for the U.S. presidential election in November, with the dollar slightly falling and Treasury bonds rising, while European stocks recover from their worst week of the year. From a political perspective, experts point out that the upcoming Democratic Party convention in August will be decisive in determining who will replace Biden. From a market and economic policy perspective, they suggest that few changes are expected.

In the opinion of Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown, operators around the world will try to figure out what Biden’s withdrawal from the U.S. election campaign means for the markets. “U.S. stock futures will open higher, but with just three months to go before the election, this is uncharted territory, and markets usually don’t like uncertainty. Besides the general nervousness, investors might expect the sectors that have received a boost from the so-called Trump trade to pull back a bit now that he faces an unknown opponent. This includes sectors like energy, banks, and bitcoin, as they are expected to receive support from a Trump administration. A prudent pullback wouldn’t be a surprise, but Trump remains a clear favorite, so don’t expect significant changes for now,” says Britzman.

Currency markets, for example, have ignored the political events in the U.S., and the news of Joe Biden’s withdrawal from the presidential race and his support for Vice President Kamala Harris is having little impact on the market in the early hours of the Asian session. According to Eurizon, currency markets are usually calm in the summer months, and this week there will be few important data releases or political meetings to stir them. Attention will be on the dynamics of intervention and stop loss in the Japanese yen, as well as any details that may arise regarding monetary policy in a hypothetical second Trump term. In terms of data, Wednesday will bring the July PMI business activity index, an updated reading of the main economic trends (especially the apparent slowdown of the U.S. economy). U.S. GDP growth in the second quarter (Thursday) and PCE inflation (Friday) will complete the week.

Candidate Question

Gilles Moëc, Chief Economist at AXA IM, argues that it doesn’t matter who the candidate is because the problems are the same. “Beyond the name of Biden’s replacement, the key issue for us is how different the rival’s economic platform will be from Biden’s. With limited time to produce a new agenda and, in any case, a decent level of consensus throughout the Democratic Party on economic issues, we wouldn’t expect many changes. We note that Kamala Harris herself and most of the natural alternatives are closely associated with the Biden administration or the mainstream Democrats,” he explains.

In the opinion of Paul Donovan, Chief Economist at UBS GWM, “politicians matter less for economies than they think.” Instead, he believes markets react if the probabilities of policies change. “What matters is who the Democrats choose as their candidate; if that choice significantly changes policy proposals; if the probabilities for the presidential and congressional elections change. It will take time to get information on any of these points,” says Donovan.

For Marisa Calderon, President and CEO of Prosperity Now, so far, Biden’s economic policies have not been bad. “President Biden came into office at a time of deep economic insecurity for many Americans. The pandemic had caused incalculable damage to the nation’s labor market and created the threat of greater systemic inequality and a potentially larger wealth gap between different communities. However, his track record to date tells a different story. With the highest job growth ever seen in the United States, his policies have helped the country get back to work. We are inspired by his track record of successes in the White House, and we look forward to continuing to work with his administration for the rest of his term to drive sound and equitable economic policy that works for all Americans,” says Calderon.

Political Proposals

In this regard, what policies are relevant? In Moëc’s opinion, regarding international trade, any Democratic candidate would likely pursue a fairly strong “anti-China” policy anyway. “Biden did not repeal the special tariffs imposed by Trump, and with public opinion harboring negative feelings about China—the Pew Center polls suggest that more than 80% of U.S. citizens have a negative view of the country—rolling back the Chinese export machine has become uncontroversial in Washington,” he says.

According to him, “the key difference with Trump would still be the treatment of imports from other suppliers, which in the event of a Democratic victory in November would spare European exporters from a smaller but still painful version of the trade war against Beijing.”

He also argues that any Democratic candidate would likely maintain Biden’s focus on industrial policy, with a continuation of the CHIPS Act and the IRA, with sustained support for the U.S. transition to net zero. “In fiscal matters, much of the savings any Democratic candidate would consider would come from allowing some of the tax cuts implemented by Trump in 2017 to expire, at least those that benefit the highest-paid individuals,” he adds.

Another relevant policy is immigration. According to Moëc, “any Democratic candidate would probably commit to reducing entry flows, but in any case, the impact on the working-age population dynamics would be less than if Trump’s hardline agenda prevails.”

The Chief Economist of AXA IM believes the situation remains fluid, but his thesis is that even with Joe Biden out of the race, it is Donald Trump who would still present the agenda with the most tangible impact on the markets, given its inflationary aspects (brutal repression of immigration, widespread increases in customs tariffs, accommodative fiscal policy). “In any case, the likelihood of any Democratic president also enjoying a majority in Congress is small, which would reduce their ability to direct the economy. The ‘Trump Trade,’ which has recently supported the dollar and put a floor under long-term interest rates despite rate cut expectations, is likely to remain active,” he concludes.

On the other hand, analysts at Edmond de Rothschild AM highlight that markets were buoyed by the Trump-Vance campaign’s promises to provide budgetary and regulatory aid to the U.S. economy. “However, the current economic conditions are very different from those that existed when Donald Trump came to the presidency in 2016. Interest rates and the public deficit are now much higher, so the winning candidate will have less room to maneuver. The economy rebounded in 2017 after slowing down in 2015-16, but the next president will face a slowdown,” they explain.

Focusing on the implications of a second Trump presidency, Elliot Hentov, Head of Macro Policy Research at SSGA, highlights that it would be logical to expect a considerable fiscal expansion in the event of a Republican sweep, with a more modest fiscal boost in the case of a divided Congress. In his opinion, there are three relevant focuses: energy, trade, and security.

“In trade, almost certainly there would be tariff increases, with a disproportionate share being imposed on Chinese imports, but other countries would also be affected. In energy, Trump is likely to amplify U.S. efforts to increase energy exports, which could increase global supply and help contain prices, benefiting net energy importers. And in foreign/security policy, a Trump presidency would likely continue extracting greater security commitments from U.S. allies, notably in Europe,” adds Hentov.

The ECB Opts for a “Meeting-by-Meeting” Approach with a Focus on Data

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Yesterday’s European Central Bank (ECB) meeting concluded without major surprises, resulting in limited movements in the financial markets. According to analyses by top international asset managers, the key takeaway from the meeting and subsequent remarks by Christine Lagarde, President of the ECB, was the emphasis on data-driven decisions.

Recent figures on service inflation and wages have not moderated as initially expected after the June rate cut. “The data flow in the coming months will determine the pace at which the ECB removes additional restrictions,” says Konstantin Veit, Portfolio Manager at PIMCO. The new projections, to be published in September, should confirm that inflation is systematically converging toward the target in the second half of 2025. Growth in the second quarter is expected to be lower than in the first, with restrictive monetary policy continuing to create challenging financing conditions, especially for companies. Before the September meeting, many data points will be released, providing sufficient confidence to resume cuts.

According to Felix Feather, Economist at abrdn, “This move reflects the ECB’s reluctance to extend its current cycle of cuts until new encouraging data is available. The central bank continued to emphasize its reliance on data, indicating that it is not committed to a specific rate path in advance.”

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, notes that the ECB also downplayed the recent uptick in inflation, which it deemed temporary, and general wage pressures, which broadly align with its expectations. “Meanwhile, downside risks to growth, mainly due to the slow recovery of the industrial sector and weak credit dynamics affecting corporate investment demand, justify the ECB removing some degree of restriction. We will have two more months of data on inflation and employment, which should pave the way for cuts, barring any upward surprises,” Ahmed explains.

Inflation Analysis

Sandra Rhouma, Economist in the European Fixed Income team at AllianceBernstein, observes that the ECB’s reaction function remains unchanged, conditioned by core inflation dynamics, inflation outlook, and the strength of monetary policy transmission. “The statement highlights that most inflation indicators remained stable or decreased in June, although service inflation remains high at 4.1% in June. However, other core inflation indicators, excluding more volatile components, are at or below 2%,” she explains.

Rhouma expects core disinflation to continue and wage growth to relax in the second half of the year. “Regarding wages specifically, the ECB appears confident that profits have started to absorb the high wage growth, weakening the transmission to core prices,” she notes.

Dave Chappel, Senior Fixed Income Manager at Columbia Threadneedle Investments, points out that while growth risks remain to the downside, labor compensation is still recovering in some sectors due to post-COVID inflation increases. “The ECB remains confident that wages will ease in the coming quarters and return to levels that will allow inflation to sustainably reach the 2% target. As this happens, the central bank will take further normalization steps, likely starting in September,” he adds.

Forecast for Upcoming Cuts

Veit’s forecast is that the ECB will continue lowering official interest rates during expert projection meetings, with the next deposit facility rate cut expected in September. “Unlike earlier this year, current market prices seem reasonable and broadly align with our baseline of three cuts this year,” Veit adds.

Rhouma anticipates two additional cuts this year, in September and December, aligning with market expectations. “This pace of cuts seems most appropriate given the data dynamics and inflation outlook. Although reluctant to provide firm guidance, it is the pace some members, even among the hawks, have started to support. Structurally, nothing has changed in the Eurozone economy to justify neutral interest rates of 2.3% in 2-3 years, as currently valued by the market,” she clarifies.

Amundi expects a 25 basis points rate cut at the next meeting in September. “Although wage growth remains high and steady, President Lagarde seems to view it as a lagging indicator of inflationary pressure, and both she and the Council appear more concerned about slowing economic growth,” argues Guy Stear, Head of Developed Markets Strategy at Amundi.

Finally, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS IM, supports the baseline hypothesis of a cut in September.

“A cut is around 80% priced in for September. We believe the upcoming data should confirm the disinflationary narrative and allow for a cut at the next meeting. Along with the increasing likelihood of the Federal Reserve cutting rates (global factors dragging yields down), we see Bund yields falling in the second half, with a year-end target of 2.25%. This keeps us constructive on eurozone duration,” he argues.

Insigneo Seeks to Consolidate Its Presence in Mexico After Acquiring PNC’s Portfolio

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Last December, Insigneo Securities LLC and Insigneo Advisory Services LLC reached a definitive agreement to acquire the brokerage and investment accounts of Latin American consumers from PNC Investments, PNC Managed Account Solutions, and PNC Bank. Following this acquisition, the firm is now focused on strengthening its presence in Mexico.

The acquisition of PNC’s brokerage and investment operations in Latin America further solidified Insigneo’s position in the Americas as a leader in international wealth management, particularly among Mexican clients. Promoting their services in strategic cities across Mexico is crucial, according to an interview with Funds Society.

“Our intention to consolidate our presence in Mexico with events in strategic cities is because, despite our clients already knowing us, we want to bring the entire executive team closer, present Insigneo in a comprehensive way, who we are, who is behind us, and what we have to offer,” said María Hernández, Market Head of Insigneo, based in Texas, USA.

“As the commercial director, I am also responsible for the Mexican market, and it is important for me to reiterate to our clients and prospects the commitment we have to this country’s market. It’s vital for us to come here, work with our clients, and be closer. We want the clients to know not only their financial advisor but also who is behind them, the support they have from the commercial director, the investment director, to our CEO,” she added.

With a significant client base in Latin American markets, Insigneo has advisors who are predominantly of Latin origin, familiar with the business, and fluent in the region’s language. This aspect is essential for the company in offering services and maintaining relationships with clients.

“This opens the opportunity to work with our clients more efficiently. The Mexican market is crucial for us. When Insigneo acquired PNC’s portfolio, one of the main goals was precisely the Mexican market. That’s why we are here today and will be in other strategic cities like Monterrey and Guadalajara, among others, on a recurring basis,” María Hernández emphasized.

### Here to Stay

Insigneo plans to maintain a constant presence in Mexico, although they do not currently plan to establish offices there. This might come later, but for now, the firm will monitor operations from its Texas base.

Hernández also mentioned other options being considered, though nothing concrete yet. She oversees the Texas and California markets in the United States and has responsibility for the Mexican market, as about 98% of the portfolio in that region consists of Mexican clients.

Insigneo also has offices in other Latin American countries, such as Uruguay, Argentina, and Puerto Rico. As a well-known and recognized company in the Southern Cone of Latin America, Hernández is convinced that strengthening their presence in Mexico is the start of their strategy for the regional market.

A Microsoft Glitch Causes Problems on the London Stock Exchange and in Banks Worldwide

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SEC fines Liquidnet

The “Blue Screen of Death,” a term used to describe a major Microsoft malfunction, has caused widespread operational issues affecting the London Stock Exchange (LSE), banks, airlines, and airports during peak tourist season.

The problems began at 5:30 GMT with an alert from CrowdStrike to its clients, warning that the company’s “Falcon Sensor” software was causing Microsoft Windows to crash and display the infamous “Blue Screen of Death.” The alert included a manual fix for the issue, according to Reuters.

The LSE website has issued a warning stating that the RNS news service is experiencing a global third-party technical issue preventing news publication. “Technical teams are working to restore the service, with no impact on the trading of securities or other services on the London Stock Exchange.” Meanwhile, Bolsas y Mercados Españoles (BME), the operator of Spanish financial markets, and the regulator CNMV have confirmed that they are unaffected by the Microsoft issue, as reported by Economía Digital.

According to EFE, Downdetector, a website monitoring service outages, has noted sudden spikes in incidents affecting various banking websites using Microsoft applications since last night. Banks such as Santander España, Kutxabank, Unicaja, and Ibercaja are experiencing issues, according to capital.es.

Travel Industry Challenges

The travel sector is one of the hardest hit, with airports worldwide facing operational disruptions. Major US airlines, including Delta, United, and American Airlines, grounded all flights due to the Microsoft outage, as reported by EFE. The US Federal Aviation Administration (FAA) confirmed the incident, affecting all domestic flights regardless of their destination. Airports in Tokyo, Amsterdam, Berlin, and several in Spain have also reported system problems and delays.

The organizing committee of the Paris Olympics announced on Friday that its IT operations were impacted by a global cyber outage just a week before the event’s start. “We have activated contingency plans to continue our operations,” the committee stated, according to Reuters.

Stock Market Reactions

Companies facing technical issues saw their stock prices decline. In Spain, financial sector stocks fell between 1.19% for Santander and 0.3% for Unicaja. In Europe, Société Générale and BNP Paribas dropped by 1.3%, while Deutsche Bank in Germany fell by 2%.

Affected by the LSE disruption, Deutsche Boerse, the operator of the Frankfurt Stock Exchange, saw a 0.95% decline, and Euronext, which owns the Paris and Milan exchanges, among others, fell by 1.25%.

Tech stocks also had a rough day. CrowdStrike’s shares plummeted by 9% in early Wall Street trading, while Microsoft remained almost flat compared to the previous day’s closing price.

Funds Society, Specialists in Asset Management: 91% of Our Readers Invest in Mutual Funds

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An internal survey conducted by Funds Society confirms that when it comes to choosing assets, our readers in the Americas are predominantly mutual fund buyers, although ETFs and other assets like Direct Securities, semi-liquid alternative funds, and Real Assets have their place in portfolios.

The survey was conducted among readers in the United States (primarily the US Offshore market) and several Latin American countries (Chile, Uruguay, Argentina, Brazil, Mexico, Peru, Colombia, Panama, and the Caribbean).

91.3% of respondents have mutual funds in their portfolios, while 82% have ETFs.

Assets such as Direct Securities have a strong presence among our readers’ investment assets, with 70.6% of respondents to our internal survey holding them.

The chapter on alternative assets is especially relevant in the current context: 63.6% of respondents have invested in semi-liquid alternative funds, but this figure drops to 58% when we talk about Real Assets.

In summary, Funds Society readers are a faithful representation of the Latin American client, both onshore and offshore, who rely on mutual funds as a vehicle to generate value, increasingly complement them with passive strategies, and still view the global rise of alternative assets with some distance.

Insights from the Financial Industry

Several fund selectors and industry professionals confirmed the trend of portfolios in the Americas having funds complemented by ETFs, while increasingly looking at private assets.

Carla Sierra, Head of Investments at Aiva, notes that they align with Funds Society readers in “carefully selecting investment funds as one of the main tools for our portfolios, complementing them with ETFs when it makes sense according to market conditions. Additionally, we have begun exploring semi-liquid alternative products to take advantage of market inefficiencies through non-traditional assets and strategies. These products are gaining relevance and becoming increasingly accessible to retail investors through various managers. We believe it is crucial to start incorporating them into portfolios while educating and ensuring an adequate understanding of these products, as they are not suitable for all clients. Our strategy seeks to continuously adapt to integrate these options, maintaining a prudent and risk-aware approach.”

From BECON, a third-party fund distributor, Florencio Mas notes that he is not surprised by the strong adoption of mutual funds by Funds Society readers because it is a growing segment: “Mutual funds have grown a lot, ETFs somewhat less, unlike in the United States. I would say that in the region, the market is still somewhat green.”

Florencio Mas also observes that the adoption “of liquid and semi-liquid alternatives is growing significantly. More and more private asset managers are coming to the region and offering their products with much more investor-friendly structures. Instead of having capital calls, they can be purchased by placing the order all at once, without filling out subscription documents, with certain liquidity windows, allowing exits monthly or quarterly, and obviously with much more accessible investment minimums. In our case, with Barings and Neuberger Berman, we see very strong demand.”

According to Paulina Espósito, Partner, Head of Sales Latin America at TIGRIS INVESTMENT, “the region has been migrating significantly to the idea of investing in investment funds. Clients initially chose individual bonds or stocks for the confidence that an individual security generated, but later, as they began to understand the product, they also understood the advantages.

This understanding stems from communication that allows for education and being informed. The great work of magazines like Funds Society, the closeness of fund families with advisors, and ongoing communication have led to this being reflected in the numbers.”

“Today, with everything experienced in these post-pandemic years, many advisors have redefined their investment model, understanding that selecting a fund involves not only analyzing numbers but also processes, as results are seen in the long term and must have the ability to manage volatility. Regarding alternative assets, the region is in that educational process not just for the advisor but for the client. Daring to choose a product that operates differently. I understand that the natural path for clients is to opt for liquid alternatives initially and then venture into illiquid ones, and as always, determine what percentage of our investments would be allocated to these types of strategies, and continually rebalance portfolios to achieve the results,” adds Paulina Espósito.

JPMorgan Chase and UnidosUS Strengthen Their Alliance to Improve Access to Housing in Latino Communities

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JPMorgan Chase and UnidosUS strengthened their partnership to support the expansion of affordable homeownership opportunities in Latino communities across the country, according to a statement.

At the UnidosUS Annual Conference in Las Vegas, held on July 17, the company announced a philanthropic commitment of six million dollars and joint policy recommendations to support homebuyer preparation, expand access to credit, increase housing supply, and preserve Latino homeownership.

The announcement follows a recent expansion of the Chase Homebuyer Grant, which increased from $5,000 to $7,500 in communities across the country identified by the U.S. Census as predominantly African American, Hispanic, or Latino.

“This includes more than 200 tracts in the greater Las Vegas metropolitan area and will help all eligible individuals reduce their interest rate and/or lower their down payment and closing costs when purchasing a home,” the statement says.

“At JPMorgan Chase, we are deeply committed to addressing housing access and affordability, particularly within the Latino community,” said Abi Suárez, Head of Neighborhood Development at JPMorgan Chase.

Although Latino homeownership has increased over the years, approaching 50% in 2023, significant barriers still exist, the organizations warn.

“In 2023, the Latino homeownership rate was nearly 25% lower than the homeownership rates for white households. This creates barriers to homeownership as a key source of financial stability and intergenerational wealth transfer,” the statement explains.

The philanthropic funding will support UnidosUS’s capacity-building and its HOME (Home Ownership Means Equity) initiative, a national effort to create four million new Latino homeowners by 2030.

JPMorgan Chase’s support for the HOME initiative will help expand solutions for high-cost households and ensure equitable access to homeownership by:

– Supporting a Latino-focused research network, the first of its kind, to inform and promote strategies and policies that advance Latino access to homeownership.
– Facilitating the exchange of best practices and knowledge among a network of UnidosUS affiliates and professionals working to address housing supply, equitable mortgages, and estate planning through convenings and collaborative assessments, the statement concludes.

HSBC AM Advocates Real Diversification Amid Economic Fragmentation and Active Fiscal Policies

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In the opinion of Sefian Kasem, Global Head of ETF & Indexing Investment Specialists at HSBC AM, and paraphrasing William Shakespeare, the key to the outlook for the second half of the year lies in “cuts or no cuts (interest rates), that is the question.”

He explains, “Interest rate outlooks have changed significantly, especially concerning the U.S., and there is a greater consensus that they will be higher over the next 10 years; which creates a very different context from the last decade.” Additionally, he believes that the next six months should be approached with a clear change in mindset: “In 2023, we talked about a hard landing, but in 2024 we are already talking about a soft landing.”

This leads to his first reflection: we are facing a more fragmented environment in terms of monetary policy and geopolitics. For Kasem, although these two ideas—higher rates and greater fragmentation—will be present over the next ten years, they carry significant weight in the short term.

The HSBC AM head points out that the expectation has shifted from seven rate cuts to just two in the U.S. for this year. “Estimates of a more aggressive policy by banks continue. Their main driver will be inflation expectations, which is the primary element that monetary institutions are weighing to make monetary policy decisions,” he states.

According to his analysis, central banks in developed markets have been very focused on supporting the economic growth of their countries, but he believes it is better to use fiscal policy for that purpose. “Many of these countries will have to make decisions about their fiscal policy objectives and not rely as much on the measures we saw during the pandemic crisis to support the economies. Of course, they will have to do this in a context where inflation has moderated but is still high,” he adds.

Regarding the second fragmentation, geopolitics, Kasem warns that certain issues have gained relevance, such as infrastructure security and the resilience of supply chains. “Again, everything is connected. Greater attention will be paid to what is done with the economy and how fiscal policies are used because we are moving toward a more fragmented geopolitical environment,” he reiterates.

Implications for the Portfolio

For the HSBC AM specialist, this latter idea is relevant when positioning portfolios. “This demonstrates that investors need to have real diversification in their portfolios, as well as thematic bets, maintaining a multi-asset approach. It could be said that the time has come for a new diversification because generating alpha will be complex,” he argues.

His first proposal for investors is to be more tactical and selective in fixed income positions. He particularly finds the yields provided by global high yield, US ABS, and the 60/40 portfolio very attractive. On the latter, he notes: “The 60/40 portfolios had a tough time in 2022, but they still work. It just needs to be reviewed because, with the changing context, we cannot expect it to perform the same way it did over the last ten years.”

Additionally, he shows a preference for reducing exposure to U.S. equities, as he believes that in the risk/reward relationship, there are fixed income assets that perform similarly and offer fewer risks.

He also maintains a positive view of emerging markets. He explains that they are now much more robust than they used to be thanks to the dynamics of their monetary policy. “We prefer to introduce emerging market risk into the portfolio because their valuations are more attractive. In particular, we prefer emerging countries that are less related to the U.S.,” Kasem adds.

Finally, the HSBC AM specialist focuses on alternative assets, particularly real assets. He warns that at first glance, they may seem less attractive than before, but they can play an interesting diversifying role in terms of asset type and source of return. “It is important to have flexibility to capitalize on opportunities in the private equity segment and also in private credit, always with a medium-to-long-term view. Having exposure to commodities, real estate, and infrastructure, both listed and unlisted, will generate very good diversification for the current fragmentation scenario,” Kasem concludes.

The EU’s ESG Regulatory Framework Is Positive, but It Needs Greater Clarity and Improvements

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According to a survey conducted by CFA Institute on sustainable finance among investors, the EU’s ESG regulatory framework contributes to an increase in Sustainable Investment but needs greater clarity and improvements. One of the main conclusions of this study is the variety of challenges faced by investors in the EU regarding the disclosure of sustainable finance, the reliability of data, and the complexity of ESG ratings.

“This study represents the views of financial professionals across the ecosystem, from large asset owners to boutique asset managers. One of the reasons we conducted this study is to understand how our members perceive the current EU regulatory regime, which aims to support and promote sustainable investment. We observe mixed opinions on the topic: while there is broad consensus that the EU’s sustainable finance regime is advancing the international agenda, a similar proportion feels that the EU’s efforts are confusing, and the lack of reliable ESG data does not justify the integration of ESG considerations into investment decisions. This is a concerning finding, and regulators need to pay attention to the sentiments of investment professionals,” highlights Josina Kamerling, Head of Regulatory Affairs EMEA at CFA Institute.

In this regard, investors are urging regulators to continue driving the international sustainability agenda but with legislation better adapted to ESG disclosure requirements to ensure alignment with their needs. Regarding the lack of reliable and verifiable data, the report concludes that the rapid implementation timeline of the applicable EU legislation has forced companies and asset managers to provide required disclosures despite the lack of reliable and verifiable data.

A testament to this is that 65% stated that the lack of reliable ESG data was one of the biggest challenges for asset managers in implementing the EU’s SFDR, while 45% consider that the high costs of obtaining ESG data and the lack of skilled personnel with experience to collect and analyze it were other major challenges in implementing the SFDR.

ESG Information

The report reveals that retail investors can be confused by the volume and complexities of sustainability information, making it difficult for them to use it to make appropriate investment decisions. 45% of respondents indicated that the amount and complexity of ESG information often lead to confusion among retail investors when making an investment decision. Specifically, 36% said that the disclosure requirements under Articles 8 and 9 of the SFDR are too complex and make it difficult for retail investors to fully understand the sustainability impact of the funds they are considering investing in.

“The lack of clear definitions in the SFDR has resulted in asset managers and companies interpreting existing rules and standards in various ways, leading to diverse implementation of the EU’s ESG legislation,” the report concludes, noting that 32% expressed that it was difficult to compare ESG products because the required disclosures are not standardized and are not comparable across jurisdictions for retail investors. Furthermore, 37% believe that the regulation of the EU Taxonomy has reached an excessive level of development, resulting in information complexity and confusion among investors and stakeholders.

Recommendations for Regulators

Following the survey’s conclusions, CFA Institute has developed several recommendations for EU regulators to “address the concerns expressed by investors.” These recommendations include:

  1.  Continuing to drive the international sustainability agenda. Focus on developing more step-by-step adapted legislation regarding ESG disclosure requirements and taxonomies to ensure alignment with the needs of financial market participants.
  2. Providing clear and consistent ESG terminology throughout the sustainable finance legislative framework. Clearer definitions would promote consistency in the implementation of ESG-related legislation and minimize diverse interpretations of rules and standards.
  3.  Considering the challenge posed by unreliable ESG data and the associated costs of collecting ESG data and training personnel for further analysis. Such issues currently limit compliance with the disclosure requirements in the EU’s sustainable finance legislative framework.
  4. Better clarifying the fund categorization system described in the SFDR for the disclosure requirements under Articles 8 and 9 of the regulation. A clearer approach could reduce the complexity of ESG disclosures for investors and mitigate greenwashing risks.
  5.  Addressing the complexity of ESG ratings and the divergent methodologies used by providers. The introduction of disclosure requirements, as envisaged in the proposed regulation on ESG rating activities, is likely to increase confidence in ESG rating providers and improve the comparability of their assessments.

Investors Remain Bullish Driven by the Expected Fed Rate Cuts

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Optimism remains among investors, according to the global manager survey conducted monthly by Bank of America. According to the entity, they remain bullish driven by the expected Fed rate cuts and strong expectations that a soft landing will eventually be achieved in the U.S. economy.

However, it is noteworthy that growth expectations in July are lower and that FMS cash levels have risen to 4.1%. “Monetary policy is too restrictive according to 39% of investors, the most restrictive since November 2008, but this, in turn, reinforces the belief that global interest rates will drop in the next 12 months,” noted BofA.

56% of managers expect the Fed to cut rates for the first time at the FOMC meeting on September 18, while 87% estimate that the first Fed cut will occur in the second half of 2024. “84% expect at least two Fed rate cuts in the next 12 months: 22% predict two cuts, 40% predict three cuts, and 22% predict more than three cuts,” the survey specifies.

A soft landing is the most plausible option for 68% of respondents compared to 11% who expect a hard landing and 18% who expect neither. The bank’s conclusion is key: “We believe that hard landing risks are undervalued, given the slowdown in U.S. consumption, the labor market, and public spending. This makes us more bullish on bonds and gold in the second half of 2024.” They add that the shift in conviction from “long stocks and short bonds” expects an impact on the soft landing narrative and policy consolidating the existing conviction.

Investors’ global growth expectations decreased to a net 27% as they anticipate a weaker economy. In this regard, the entity explains that the increased pessimism about global growth this month is partly due to more negative U.S. growth prospects.

In fact, 53% of investors expect the U.S. economy to weaken, the highest percentage since December 2013. For now, two out of three investors still do not expect a global recession in the next 12 months. Specifically, 67% say a recession is unlikely, slightly down from 73% in June.

Complementing this view, “higher inflation” is no longer the main risk identified by managers, replaced by geopolitics. “87% expect lower rates, 81% a steeper yield curve, and 62% predict at least three Fed cuts in the next 12 months, starting on September 18,” noted BofA.

Asset Allocation

In this context, investors generally increased their allocation to utilities, U.S., emerging markets, and the UK, and reduced their exposure to the eurozone, commodities, and discretionary spending. Specifically, in July, investors remain overweight in equities and underweight in bonds. Notably, eurozone equity allocation fell to 10%, with a 20 percentage point month-over-month decline; the largest monthly drop since July 2012. Conversely, equity investors are more overweight in healthcare, technology, and telecommunications.

“71% of investors believe that being long in the Seven Magnificent is the most crowded trade. July marks the 16th consecutive month in which it has been the most crowded trade. 45% of respondents do not believe AI is a bubble, but a growing 43% of investors do,” added BofA.

It Is Unlikely That the Fed Will Start Lowering Rates This Year, According to Vanguard

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Despite Fed Chairman Jerome Powell hinting on Tuesday that a more flexible monetary policy might be resumed at some point this year, suggesting a potential interest rate reduction, some market participants consider it unlikely. The Fed has maintained its benchmark rate between 5.25% and 5.50% for just over a year, starting in June 2023. At least four rate cuts were expected this year.

Vanguard released its report, “The Rise of Rates Will Persist, but Not Political Divergence,” for investors, which includes its mid-year economic and market outlook. In the report, their experts believe it is unlikely that the Federal Reserve will start lowering rates this year.

Although macroeconomic conditions suggest that emerging markets should cut rates, it is almost certain that they cannot do so before the Fed; usually, the opposite happens, and when markets move ahead, it is because there is near-absolute certainty.

In this regard, how central banks set their policy will depend on their assessment of the origin of inflation in their respective countries and whether it is driven by demand or supply shocks.

Vanguard unequivocally states that rates will not return to zero. Currently, the neutral rate is higher than before the COVID-19 pandemic.

Another relevant factor is the current conditions and context. “The current economic cycle is not normal, given unprecedented economic shocks including a pandemic, a war in Ukraine, and rising geopolitical tensions,” explains Vanguard.

Another significant factor is the uncertainty surrounding elections worldwide, including the upcoming U.S. presidential election on November 4, which is perhaps the most relevant for the world.

Vanguard advises that due to the critical global context, it is important to maintain global diversification and a similarly diversified and balanced approach to personal investments.

“Despite the unexpected strength of the U.S. economy, the events of the first half of 2024 have only reinforced our view that the environment of higher interest rates is here to stay,” states Vanguard.

Vanguard’s regional chief economists, Roger Aliaga-Díaz for the Americas, Jumana Saleheen for Europe, and Qian Wang for Asia-Pacific, discussed the implications of global divergence in rate policies and the role of a higher neutral rate in this environment.