US Election Special

SH – Simon Hildrey / JH – John Husselbee / TP – Thanos Papasavvas

SH: Welcome to this special Multi-Asset video. It’s been an incredible year of elections all round the world and 5th of November, of course, we’ve got the US presidential election. Arguably, this election has more unique circumstances than any other presidential election in history. I’m joined by Thanos Papasavvas, who is a consultant to the Multi-Asset team, and by John Husselbee, Head of the Multi-Asset team. Thanos, let me start with you. Before we look at the US election, what impact do you think the elections around the world, like India, Indonesia, etc., and the UK, of course, that we’ve seen so far this year?

TP: I think it’s been, as you mentioned Simon, an incredible year in terms of number of elections. We started in January. We had Mexico. We had Indonesia. We had Taiwan. We then had South Africa. We had India. We even had Russia. We had the UK. We had the European Union, of course, leading to the US. We also had some states within Germany which identified some areas of interest and concern.

But to answer your question, I think there are two particular elections that came out with a surprise. Number one was in Mexico. It was a very clear supermajority for the current administration, as we see the shift of power from AMLO to the new president, which has raised concerns of a constitutional shift which may not be that orthodox. That’s on the one side. On the other side, closer to home, in France we had surprise election in France following the European Union parliament elections, where we saw a very clear upside risk on the French far right side, with Le Pen, and more recently also with Austria.

SH: Do these results impact your view of economics or investment markets?

TP: In terms of Mexico, there have been some concerns in terms of the broader impact this may have in Latin America and on orthodox policy views. However, generally, in emerging markets but also in Latin America in particular, we tend to focus more on the orthodoxy of the central banks and the finance ministries because a number of those countries have historically had left-wing governments but, despite that, maintain a very prudent economic policy, especially since COVID, where they contained inflationary pressure and managed to contain that economic growth. In terms of Europe, I think we’re seeing a broader shift to the right, right or far right. We’ve had parties within Holland, France, Italy, Austria but also Hungary, clearly, where we’ve seen the shift towards the right and that may be a structural issue that the European Union has to face, especially if we do a see a right-wing shift with the Trump administration in the US.

SH: And does that impact economic policies, then, and economic growth potentially?

TP: It does impact economic growth and economic policies, partly because some of the issues may be structural in nature. For example, the immigration issue may be structural. Also concerns around climate change, the cost of climate change and whether the focus should have been more on the S rather than the E but also, if you like, some alignment with Putin’s Russia rather than Ukraine in the further right parts of the European Union.

SH: And John, as Head of the Multi-Asset team, has it had any impact on how you’ve looked at markets and running the funds and portfolios?

JH: I think essentially, when it comes to elections and politics, a lot of it can be noise and you’ve got to try and tone that out of your investment process. I think still, at the end of the day, we react to the signal, and the signal being fundamental. Elections and politics can create valuation anomalies and when you see that valuation anomaly, that’s the point where you’ve got to react to markets but in most cases, as you said, I think you see a lot of noise in the market. And we’ll go on to talk about the US election and again, there, I think it’s hard to take a bet in such a binary outcome as an election.

SH: Well, let’s turn to the US. Thanos, who is going to win? And, of course, it’s not just one election, is it?

TP: Of course not. I think there’s three elections. There’s the election on the White House. There’s the Senate. There’s also the lower house, Congress, the lower house of Congress. Now, in my view, it was a contrarian view but back in 2016 I called for Trump to win. That was partly because of the Brexit but also the Yellow Jackets, which showed signs of a sentiment away from globalisation because there was a group of the population which did not benefit from the globalisation. And I felt that was going to be reflected in the US with a portion of the population not wanting to be seen as Trump supporters.

And I do believe that 2024 will also most likely move in favour of Trump, although Kamala Harris has managed to reduce that significant advantage that Trump had. And if you look at the US elections currently, the national polls continue to be in favour of Kamala Harris but if you focus on the battleground states, there are seven battleground states, a week before today of those three were in favour of Trump, three were in favour of Harris and one was a complete tie. Currently, we just looked at the data yesterday, six are in favour of Trump. So, there is a slight advantage towards Trump, which I believe is going to materialise and we can talk the reasons soon, why.

SH: John, do you want to pick a winner before we look in more detail at the two candidates?

JH: I’d rather sit on the fence, to be honest with you. Let the experts take that. I do think, in terms of the outcomes, I’m just looking basically at the valuation anomaly today from where we sit and the US, particularly in large cap growth space, seems to be expensive and where it seems to be cheaper is in mid and small caps. So if you want perhaps a winner that will be favourable for that sector, you could argue that that would be Trump because therefore he tends to be more pro-business, pro-economy, deregulation, etc., and therefore perhaps that would support those types of companies. So, I suppose as a good outcome in terms of where the valuation anomaly is today, then that would be Trump. That would be the way I would summarise it today.

SH: I think we’ll come back to the full impact but just let’s just delve into them a bit. In terms of the two candidates, Thanos, what would the impact, do you think, be economically of either of them?

TP: Of course. John is right. It’s very mild in terms of where it falls but in terms of an economic point of view, I totally agree with John that either candidate is going to pursue a fiscally expansionary economic policy, so under both candidates the economy is most likely to see elements of growth.

The difference between the two candidates in my view is in terms of their relation to the Federal Reserve. Under a Kamala Harris administration, I believe that she’ll be very hands-off the Federal Reserve, so as and when the Fed feels that the interest rate should start tightening again because of the potential inflationary pressures coming through, she will not stand in the way, she will not try to intervene and therefore the orthodoxy and the independence of the Federal Reserve will not be questioned.

Under the Trump administration I believe that Trump will be looking to replace Jay Powell once his second term comes due, which is the 15th of May 2026 and I believe that he will appoint someone who he believes will be very much aligned to himself. Now, in my view, he or she, whoever replaces Jay Powell as the next Fed chairman, will not abide by the Trump doctrine ideology. I believe that that person will very much fall in line with the ethos and the presence and the stature of the Fed and maintain orthodoxy. But it will raise some issues in terms of potential volatility and how soft a Trump administration may be towards inflation.

SH: Geopolitically, the difference between the two? There's lots of speculation about what Trump might or might not do.

TP: Geopolitically, I think Trump, in my view he gets a negative, and to be clear here it's not I'm in favour of Trump or against Trump, I'm trying to be objective but I think it's important to state. I believe that Trump has had a negative bias in terms of views around geopolitics because if we look at his track record, number one, he did raise the point that the US-China relationship was not fair. And that's true. It was not fair. It was biased towards China.

Secondly, he did warn Germany and the European Union that there was a very strong reliance on Russia, which he felt was not advantageous. Third, he rightly also complained that the NATO countries should pay for their fair share of 2%. Why should the Texans and the Arizonians pay for the protection of Portugal, Spain, and so on? And then the last thing, which I think also is significant, he also opened the lines of communication between Israel and the Arab states under the Abraham Accords before he left policy. So, that's what Trump has done.

In terms of the Democrats, in my view the Democratic administration has been more hawkish than what people realise or expected. Because of China being, if you like, a bipartisan topic, they pushed a very aggressive doctrine on China, the Sullivan Doctrine. They exited from Afghanistan without mentioning it or informing any of their allies. They replaced France with Australia in terms of the AUKUS nuclear submarines deal. And to be fair, they have not reversed any of the tensions which the Trump administration put towards Europe.

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So, it's not as if the Biden administration and is going to be more dovish or helpful towards Europe or towards the UK. In that sense, I believe that the hawkishness surrounding a potential Trump administration is not necessarily true and fair. I believe the uncertainty of not knowing what Kamala Harris's foreign policy is could be an uncertainty, could be a reason for concern, and what that impact has in terms of Netanyahu and Putin.

SH: Do you both think that a Trump win would be more beneficial, positive for markets or would both be beneficial for markets?

JH: As I said, I think that Trump in the past has been more pro-business, with tax cuts, regulation cuts as well but equally this whole sort of contracting of globalisation. I think the other issue to discuss is one of the trade deficit. I think what's driving globalisation a lot today is that trade deficit in the US, which has obviously grown wider and wider and wider. And it seems to me, Thanos, that it doesn't matter whether it's Democrats or Republicans in the White House, they both want to tackle that trade deficit. And in doing so, that, as you said, the fiscal spend, supportive monetary policy as well, to try and get US businesses going, that sort of renaissance in the US, seems to be on the agenda of both of them. But I wonder how the difference is in terms of how aggressive Trump will be compared to Harris?

TP: I believe, John, that comes back to the point which Simon mentioned earlier on, that it's not just one election, it's three elections. And the question then becomes, what will Trump have as power? He already has the Supreme Court. It's tilted on the Republican side. The Senate, simply because of the nature of the of the way that the Senate works, which is a third of the Senate gets voted in for six-year periods for every two years, a change, one third of the Senate changes. And at this point in time, it so happens that the Senate will very likely turn Republican.

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And then the question is if hypothetically we have a Trump administration with a Supreme Court, mostly Republican, the Senate Republican, then the question is on the House. And that, I think, is a big, big issue, that if there is a full ‘red wave’ where Trump controls both houses of Congress, then the risk of unorthodox economic policies and the potential risk of volatility may rise.

JH: Whereas, if Harris is in, you don't get a blue wave. It's very unlikely, isn't it?

TP: Yes, because of the Senate.

SH: So, that's one of the key things to watch out for, actually, beyond just who wins the presidency?

TP: Totally. That will have a big impact.

SH: And, John, have you made any changes? Are you making any changes? Would you make any changes to portfolios in the lead-up? Again, I think, as I said, we try to cut out the noise. Clearly, as we go into not only an election year, there's been a lot of noise and quite rightly talk about the UK election and is a budget coming up as well? So, there's more noise around that but the noise is only going to increase all the way through to the beginning of November.

I think it's important as an investment manager to try and ignore that and look, as I said, for fundamental signals, look for valuation anomalies. And I think for quite a while now in the US, we've seen it as an overvalued market, perhaps relative to the rest of the world and specifics within that, the sort of large cap, small cap that we've already spoken about. But I think the valuation anomaly is very much outside of the US, emerging markets, for instance. Perhaps we could talk about US currency and, certainly, the dollar against sterling and, indeed, the dollar index has weakened over the last few months, I'd say quite significantly. And as a result of that, that's very supportive for emerging markets. If we see that continuation of the weaker dollar, that will help that region in particular, I would say.

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SH: How could the results affect the US currency and, therefore, markets?

TP: I think that the dollar tends to appreciate in two scenarios. Number one, if there is a sort of a significant risk-off event, geopolitically driven, where assets come back to the safe havens and that's where you see the dollar appreciate or if there is a very clear economic differential in favour of the US versus everyone else, which we had seen for the last few years. And, as John mentioned, this has corrected more recently, as the rest of the world seems to be catching up with the US and the US economy has started to show signs of a slowdown after protracted periods of tightening.

So, to answer your question, I think that there will be some volatility in terms of the dollar, assuming that a Trump administration, assuming that he becomes verbally quite hawkish in terms of China, for example. And that's where I believe that there should be some sort of managed expectations on whether what Trump says is actually what he does. Under Trump 1.0 it was the case. In Trump 2.0, I think he’d potentially bluff his way a little bit because of his previous experience. I am not sure if it would be beneficial for him to raise tension significantly. A level of tariffs is expected but anything beyond that I think could adversely impact the economy and therefore be positive for the US dollar in that scenario.

JH: Leading into the election, and when it was Biden I would have said that one of Trump's biggest assets was his ability, that sort of communication and the debating thing, which clearly in that debate with Biden, if there is a winner, he clearly won it. When he came up against Harris, it was sort of neck and neck, if anything, perhaps, depending on which channel you switch on, perhaps Trump lost that. What is now Trump's main way of getting his message out now, if it has been blunted by that debate?

TP: I think, from a personal point of view, I also saw Kamala Harris’s debate with CBS, with 60 Minutes, worth having a look at that, which was not that great. So, I think Trump is basically waiting. Rather than disadvantaging himself with another one-to-one debate with Kamala Harris, he’s probably waiting, stepping back to see if Kamala scores an own goal, number one. And number two, I think what also potentially helped the Trump side more recently is JD Vance's debate with Tim Walz, which was a strong help for JD Vance, because he polished Trump but he also came strongly across and Walz was a little bit on the weaker foot in the beginning.

JH: So, vice presidents will have more of a part to play in this election than perhaps previously or have they always had a big part to play?

TP: They didn't really have much of a part to play. The difference is on the Republican side because Trump is old, he's not as old as Biden, but he is old. The eventuality of JD Vance potentially stepping into those shoes is something which needs to be considered. And my personal view is that Kamala Harris could have chosen Kelly, Senator Kelly from Arizona, instead of Tim Walz from Minnesota, because Minnesota was already Democrat, whereas Arizona could have tilted Democrat from Republican. And also he, himself, could have been the immigration tsar, which is one of the weaknesses which Trump manages to pin on her. So, I think that was a tactical mistake.

SH: Thanos, what will you be looking for, particularly in terms of the seats and the states on the night?

TP: I think, Simon, the focus will need to be on the key battleground states. We have Arizona, we have Pennsylvania obviously, which is going to be important, we have Nevada, North Carolina, Wisconsin, Michigan. But of those, I believe that Arizona, and particularly Pennsylvania, will be crucial. So, focus on the battleground states and within that some, such as Pennsylvania, which has 19 Electoral College votes, is going to be key.

SH: We know the election result is going to be very tight. What's the likelihood of challenges or other issues around that event?

TP: Well, there's already work being done as we speak in terms of the potential challenges and awareness being raised from the Republican side. And what that means is that if on the night, for us it'll be early in the in the morning, if we do see the Democrats ahead of the Republicans, there will be clear challenges. I don't see Trump seceding or accepting that loss. And depending on the magnitude of that loss and especially if it's quite tight, we could see unrest, potentially social unrest, over the next few weeks as the Electoral College votes but also as the states try to battle out what has happened and also leading to the final decision, which always takes place in early January. So, there could be a potential risk of social unrest, economic uncertainty, some volatility in the interim, whilst we clarify who wins. But that's only if the Democrats are coming up at marginal levels above the Republicans.

SH: Obviously, the US is also significant, but I just very briefly wanted to touch on the UK, which in global terms is less important but I think for everybody watching, clients, obviously it's important in driving sentiment, client sentiment and confidence. Just briefly, how significant is the budget at the end of October and what are the catalysts that we need? People talk about the UK being cheap, cheap against the US. What needs to happen for that to be realised?

TP: From my point of view, it's all about economic orthodoxy and I've been having a chat with friends and clients of mine who have being complaining that this is a tilt to the left, a Labour government, but it's not really acting Labour. It seems to be sort of acting more like a Conservative Party. And in my view, the number one key factor for the administration is to win the buy-in from the markets, not just the UK markets, the international markets, that they're there with an orthodox view. They want to maintain the economic policy alongside a clearly independent Bank of England. And as long as that is maintained, I believe that the next steps will gradually fall in line and address some of the cultural and social issues that we need to address in the UK in order to improve productivity. But number one, step number one is to maintain that buy-in from the markets, that everything is moving in line with orthodox policies and maintain the gilt levels at reasonable.

SH: And therefore to attract more international investors in the UK?

TP: Exactly. For investors not to be not to be worried, not to be scared, not only about the gilts but also, as you alluded to, the UK market, which is very attractive.

SH: Yes. And John, obviously, you’re a believer in the UK valuation story?

JH: Oh, most definitely. When you look at our scoring, we're scoring it four out of five, so therefore we're definitely taken by the attractiveness of the UK. The reality, though, is when we're building portfolios we have to appreciate that the UK is less than 10% of the world's global economy and less than 5% of markets. So, whilst we are overweight there and it’s our domestic market, we probably have more because of that. It is not the largest part of the portfolio.

TP: My only one slight caution is on the monetary policy side because the UK as a country has had a tendency of higher inflationary pressures historically. The bank made a mistake. Obviously, a number of central banks made that mistake in terms of talking down inflation and reacting with some lag. And my only caution is we are seeing some stickiness, not of the headline, but also on the core component. And although the Bank of England may want to cut rates aggressively, and the governor has mentioned that, I would rather wait and see the proof of inflation being contained before we see some action from the central bank.

SH: I just want to finish on diversification. John, everyone talks a lot about diversification, sounds very simple, but how would you say you achieve diversification, especially in the current environment, where the market environment is changing?

JH: I suppose diversification in very simple terms, not having all your eggs in one basket, having a spare tyre when you go on a journey type scenario. It sounds simple but in investment terms how do you achieve it? And you achieve it by building portfolios from the top-down, in our case. We achieve diversification, first of all, by asset class, according to the appropriate risk of the client, having a balance between equities, bonds and other assets, including cash as well.

The next layer down on diversification is the geographical diversification as well, having a good spread of assets and then, furthermore, the diversification that we achieve through our manager selection, selection of funds. That’s by investment style, so that could be value, it could be growth, it could be momentum, it could be quality. And the other diversification that we have as well is by the size of companies, so mid and small caps, large caps, diversification.

I think diversification, you have to accept that while something is winning, something else may be losing, but it’s the combination that keeps you in the game. And that’s what it’s all about at the end of the day. You’ve got to stay the course. You’ve got to stay in the game. You don’t bet the ranch, in terms of one asset class, one country, one region. You basically have a spread to stay in the game.

SH: But has this become harder over time, especially with things like the Magnificent Seven almost skewing markets a bit, if you like?

JH: It's been harder because with the benefit of hindsight, perhaps not in the most recent history, but we only have to go back a year or 18 months, quite frankly, a portfolio which had 100% in US equities or US assets, I should say, so that's equities, bonds and then the cash, if you're a sterling investor, US has been by far one of the better equity markets over the last decade. Bonds have done quite well in the US, particularly with sterling weakness, which today may be in the 130s but it wasn't so long ago, it was knocking on the door of near parity, one-to-one.

So, that with the benefit of hindsight would have been basically the best portfolio to have, but that was in a different environment. That was an environment post the Global Financial Crisis, where the cost of money came right down. We spent a long time, central banks, trying to get inflation back into the system. We're in this deflationary environment. Things have changed quite enormously and today central banks, albeit fighting the battle with inflation and being successful, they're not going to bring it back down to the levels that we've seen previously. And as such, the cost of capital, interest rates are not going to come back down to zero any time soon. We're in a totally different environment, so there's no point taking what has worked in the past and using that in the future. And in that uncertainty we've got today, I think that's why diversification is basically the best strategy you can take from here.

SH: It has to be dynamic, not static?

JH: Correct.

SH: Thank you, Thanos. Thank you, John. And thank you for watching. We'll be talking to Thanos and John again in November, post the US election, to look at what the result means.