Asset Management

Investors’ Outlook: A new era of co-operation?

Outlook
Dan Scott

Dan Scott

Chief Investment Officer, Head of Investments & Thematics

 

This title seems counterintuitive given that Donald Trump and Xi Jinping seem ready to jump at each other’s throats. But in light of the possibility of a Joe Biden win in November, tensions between America and China may ease a few months from now. In any case, the US presidential elections will be as exciting to follow as in 2016.

In an attempt to boost the US economy back to its pre-Covid-19 levels, the US Federal Reserve reaffirmed that interest rates will remain at the current low level for years to come. The European Central Bank pushes a similar line, as do most other central banks, thus lending support to asset prices. Whether they will manage to successfully stoke inflation and solve mounting debt problems with the monetary policies in place remains an open question. The markets remain skeptical.

Meanwhile, a solid V-shaped economic recovery is underway in China. Recent data shows that output and new orders are picking up. The world’s second-largest economy is on track to reach its 2019 fitness level by the end of the year. At the other side of the world, the US economy is also showing signs of a V-shaped recovery, with key figures ticking up. In Europe, the situation remains more fragile. The euro zone’s growth is set to plunge 8% this year, compared to a 4% dip in the US and a 2% increase in China, according to the Organisation for Economic Co-operation and Development.

Bolder approach to emerging markets

Despite the strong growth prospects offered by emerging economies such as China, most investors only hold around 5% of their wealth in emerging-market assets. Their natural home bias and concerns over high risks associated with emerging markets prevent them from adopting a bolder approach. Consequently, many an investor willingly misses out on bargains within reach, and is left sitting with prospects of substandard growth rates as well as decades of zero interest rates in developed economies. Meanwhile, a keen eye for emerging economies seems to make sense. Not only are their fundamentals better than those in industrialized countries, but emerging-market equities and certain types of bonds also offer far better valuations. We therefore recommend raising the exposure to emerging-market assets to more than double the current average.

Markets for Trump?

Across the Atlantic, the US presidential and congressional elections are quickly approaching. Financial markets, which tend to prefer Republican Party presidents, have already priced in higher volatility before and immediately after these events. At the time of writing, a Democratic sweep across the US seems likely on November 3. Polls see Joe Biden in the lead, even though Donald Trump has been closing the gap during the past months. Historically, status-quo-loving financial markets sold off each time the challenger ended up winning the ultimate US race. Under Biden, who represents Main Street, not Wall Street, American companies and the richest individuals would face higher taxes. A more constructive geopolitical dialogue, on the other hand, could free us from trade war fears. Should the Democrats also manage to obtain a majority in both chambers of Congress – as the polls currently suggest – we would probably need to adjust our investment strategy. However, it would hardly shake our confident view that the global economy is gradually recovering.