Here's a contrarian take on the best US election outcome for markets from a $65bn money manager. And the one asset class to own that you are overlooking right now.
- Rathbones' head of asset allocation research Edward Smith provides a contrarian take on the most market friendly outcome for global investors in the US election.
- Smith breaks down why a large sell-off following election day creates buying opportunities and outlines the asset class most overlooked by investors right now.
- "Emerging market debt is interesting to us, especially as this year something really game changing happens," Smith said.
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One of the leading UK wealth and investment management firms, Rathbones, has a perspective on the most market friendly US election result that might irk a lot of US investors.
While most analysts believe a clean sweep from the Democrats or Republicans would be the most market friendly result because it would mean a smooth passage of a second stimulus package, boosting the economy and in turn the US stock market.
Rathbones, which manages over £50 billion ($65 billion) for clients, is instead thinking globally. Its head of asset allocation research, Edward Smith, believes the best outcome would "arguably" be a Joe Biden presidency with a split congress.
Under this outcome, the stimulus package will not be as large as many US investors are pricing in under a clean sweep by Democrats or Republicans.
"I totally agree that it wouldn't be as stimulatory a package as it could have been," Smith said. "But it's enough."
But the package, he argues, will still be sufficient enough to support the US economy.
This outcome would bring two advantages to global investors. Firstly, having Biden as president means he will likely take more of a traditional approach to trade policy, easing some global tensions and, in turn, potentially benefiting non-US equity markets. Secondly, a split congress will also mean that Biden will be unable to pass some of the policies the markets fear most, such as corporation taxes, Smith said in his recent investment report.
From a global perspective, this election is ultimately about whether global policy uncertainty will continue, Smith said.
On the day, investors should not make rash decisions, Smith advises, but instead analyze what the potential policy implications will mean for their holdings over the long-term.
"We're expecting a lot of volatility, we've seen the price of VIX futures really spike, more than what you would usually see in an election month," Smith said. "So don't do that sort of classic behavioural trap of seeing a reaction and sort of it confirming some sort of bias."
However, a knee-jerk reaction from investors in either a Democratic sweep, or a contested election scenario could create buying opportunities, Smith said. He said a sell off of 10% or more, he would see as a buying opportunity.
In the case of a contested election, a sell-off could likely occur from a policy gap in the ability for the US to stimulate the economy during this time frame, especially as the stimulus package has been one of the core drivers in the market, Smith said.
"Equities, although they often don't behave like it, are basically long term investments, they're out discounting earnings way into the future into today's price," Smith said. "So we think a large sell off could be a buying opportunity."
An overlooked asset class
In amongst all the US election noise, one asset being overlooked is emerging market debt, Smith said
"Emerging market debt is interesting to us, especially as this year something really game-changing happens," Smith said. "You had, for the first time in emerging markets across the board, being able to conduct counter cyclical monetary and fiscal policy. They usually can't do what the Bank of England, or the Treasury, or the Federal Reserve does and cut interest rates or start spending more money."
Historically, investors have viewed emerging markets as not having the institutional credibility to implement these policies wisely, Smith said. Previously, emerging markets would increase rates to stop money leaving the country, which in turn makes things worse when a recession hit, he said.
But for the first time, emerging markets have implemented counter-cyclical policy and in some cases quantitative easing, which has resulted in currencies generally staying stable, inflation staying low and yields yet to rise, Smith said.
"So if that means that now we're in a world where emerging markets can smooth growth," Smith said. "And then that should mean that we're in a world where we should apply a little lower risk premium to emerging market assets, because they're less risky places to be."
Emerging market debt could be the one asset class to keep watch on if Biden returns to the White House, either in a split congress or a Democratic sweep scenario, as trade tensions are expected to ease with his more traditional approach toward geopolitical issues.
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