With a year to go until the next US presidential elections, it seems like an appropriate time to start thinking on what the political event means for investors and its impact on the US stock market.
In this interview, Eugenia Jiménez talks with Kevin Thozet, member of the Investment Committee at Carmignac, on the challenges and/or opportunities the US equities might present for investors in the next 12 months.
How likely do you think that US stocks will perform well over the coming election year?
Political uncertainties do indeed impact equity markets as global investors have been regularly reminded over the past months on both sides of the Atlantic.
The coming US presidential election should be no exception. It has historically been the case as illustrated by the behaviour of the healthcare sector, which typically sees its discount relative to broader equity markets widen ahead of elections.
Besides, next year's election and the run-up period should bring some further volatility given the measures put forward by some candidates of the Democratic primary - being particularly vocal against those sectors at the forefront of the US economy and advocating debt financed fiscal actions.
Globally accommodating monetary policies have largely benefited to Wall Street with the ensuing inflation of assets prices. Yet they have globally failed to spur inflation expectations much higher and the benefits linked to growth in asset prices have been far from widespread across the US population. As such, we could expect to see some evolution from the past policy mix and, candidates aside, we could well see debates increasingly pushing for the fiscal pendulum swinging the other way, advocating for some more wealth redistribution. Such a position being even more encouraged by globally low financing costs.
Cyclical sectors would likely benefit from such reflationary intentions, even more so given the relatively light positioning on those assets as global investors did tend to favour deflationary investments.
Yet more than next year's election, the main factors for US stocks to outperform in the coming year are i) how rapid and steep the US slowdown will be and ii) how much easing will be conducted by the Federal Reserve.
How likely do you think leading indicators such as the inverting of the yield curve will actually be followed by a recession in the US in the coming year?
If we are expecting its growth rate to continue converging with the rest of the world, we do not expect the US economy to enter recession. Indeed it seems difficult to see a recession unfolding given the relatively loose financial conditions, all the more so should the USD would start receding. Besides in the wake of this prolonged slowdown we believe the Federal Reserve can and will do more than it currently signals which would also prevent the economy from entering into recessionary territories.
As per the yield curve inversion per se, if it has historically proven to be a reliable signal for recession, unlike what has happened in previous occurrences the latest inversion move has come from a fall in long term interest rates and not from the FED tightening (as it has been the case in previous yield curve inversions signaling recessions). Again on historical standards, the only time this has happened (yield curve inversion and falling short term rates), it has proven to be a false signal for recession.
Going forward, the fall in long term interest rates are at first helping the economy allowing households to refinance mortgage and providing some form of relief for the US consumer. Besides the FED has some gunpowder to provide some further easing so as to support its economy as would the increased probability of a Trade truce on manufacturing.
Yet over the medium term such economic stabilizer tends to bite back notably with the fall in long-term rates negatively impacting banks' profit margins and hence their willingness to lend.