U.S., French and Indian elections may have a minimal effect on
equity markets, particularly in the short term, according to our
Global Head of Fixed Income and our Chief Global Cross Asset
Strategist.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed
Income and Thematic Research.
Serena Tang: And I'm Serena Tang, chief
Global Cross Asset Strategist,
Michael Zezas: And on this episode of the
podcast, we'll discuss what the elections in the US and Europe
mean for global markets.
It's Wednesday, July 9th at 10am in New York.
As investors digest the results of the French election and
anticipate the upcoming US presidential election, there's some
key debates that are surfacing. And so I wanted to sit down with
Serena to dig into these issues that are top of mind for
investors.
Serena, do you expect the upcoming US elections will impact
markets in the run up to November?
Serena Tang: Significantly, not likely --
because if we look at history, for stocks for example, in any
election year, returns don't look significantly different from
any other year.
Serena Tang: My team ran some cross asset
analysis on market behavior in and out of prior US elections
using as much data as we have. And what has been very interesting
is that whether a Democrat or Republican candidate eventually
takes the White House, that doesn't change the trend of returns
into an election.
The form of the future elected government, whether it is divided
or unified, that has also never really bothered stock markets
before the vote. And you can see very, very similar patterns in
bond yields, the dollar and gold. Now, what this means is that
even if an investor has perfect foresight and know the results of
the elections now, it won't necessarily give them an edge over
the next few months.
Serena Tang: Now, beyond the election is
really when you see performance in various election outcome
scenarios really diverge. So, whether the election was tight or
not seemed to have led US rates to see very different levels of
returns 12 months out from an election. Whether the outcome means
a unified or divided government saw very large swings in gold
prices.
Now there are a lot of caveats. Every election is different. The
economic conditions in every election is different. And as much
as we talk about other historical periods, the truth is there
aren't a lot of data points to work with. Data for S&P 500
going back to 1927 reaches the most far back among the major
markets, but even then it only covers 23 presidential elections.
So what I'm trying to say is there have been a lot of presidents,
but there aren't a lot of precedents, at least for markets.
Michael Zezas: The US election isn't the
only election making headlines this year. For example, we just
had an election in France that had a surprising result. How does
the outcome there affect your outlook on the market?
Serena Tang: It doesn't, in short. It
doesn't change our bullish view on European equities at all. As
you know, we have been constructive on that market since January
and added significant exposure in our asset allocation then --
very much on the back of our European equity strategist Marina
Zavolok coming out with an out of consensus bullish call for
European stocks.
Serena Tang: We like the market because of
its cheap optionality and convexity. It has about 20 per cent
revenue exposure to US but at much cheaper valuation. And it has
about 20 per cent revenue exposure to EM, meaning should we get a
growth surprise to the upside; you're geared to that but at much
lower volatility than owning EM equities outright.
Now, none of this has changed post French elections, and we also
don't see significant increase in bearish tail risks. If you look
at other markets like Euro IG corporate credit or the euro, those
markets are suggesting risks in France are idiosyncratic, not
systemic. So we maintain our overweight in European stocks.
Serena Tang: Everything that I just said is
also true for our bullish view on Indian equities, even after
elections a month ago. Ridham Desai, head of India research,
argued the election outcome there is likely to usher in more
structural reforms and really reinforces our forecast of 20 per
cent annual earnings growth over next five years, sustaining
India's longest and strongest bull market ever. Bullish secular
factors for Indian equities have not changed and therefore our
bullish view on Indian equities have not changed.
Michael Zezas: And elections have
consequences for how countries interact with one another. And how
their policies differ from one another. And one area of the
markets that tend to be sensitive to this is the foreign exchange
markets. So are there any impacts you're looking for around
foreign currencies?
Serena Tang: Yes, in particular, the
dollar. But let me start with the euro first. Because I talked
earlier about our bullish view on European equities; and in fact,
in our asset allocation, we actually have a higher allocation to
Europe versus US for stocks, bonds, and corporate credit bonds.
The one European market we're more cautious on is the euro. And
this actually has nothing to do with the French election results,
per se -- because what matters now really is dollar strength.
Now, part of this is a rates differential issue. Our US economics
team are expecting the Fed to start cutting in September, while
the ECB, of course, has already started easing policy. So yield
differentials really favor the dollar here.
But we also need to factor in the election, which seems to be the
theme for today. Our FX [foreign exchange] strategy team thinks
markets really need to start pricing in material likelihoods of
dollar positive changes in US fiscal, foreign and trade policy as
the election approaches. Meaning the dollar will continue its
modest uptrend into the second half. And geopolitical
uncertainty, of course, will also be dollar positive.
Michael Zezas: So bottom line then.
Elections clearly have consequences for markets but in the run-up
to an election, there might not be a reliable pattern.
Serena Tang: Exactly.
Michael Zezas: Great. Well Serena, thanks
for taking the time to talk.
Serena Tang: Great speaking with you, Mike.
Michael Zezas: And as a reminder, if you
enjoy the podcast, please take a moment to rate and review us
wherever you listen to podcasts and share Thoughts on the Market
with a friend or colleague today.
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