On Friday October 23, we hosted the latest in our series of Experts Talk sessions, designed to share expert insight on the important issues of the moment.
With 11 days until the U.S. elections, Salman Mahdi, Vice Chairman of Deutsche Bank International Private Bank, was joined by three distinguished speakers: John Emerson, Vice Chairman of Capital Group International Inc. and former United States Ambassador to the Federal Republic of Germany, Frank Kelly, Head of Government & Public Affairs, Deutsche Bank – Americas, and Deepak Puri, Chief Investment Officer for Deutsche Bank International Private Bank in the Americas.
Together they discussed the final run-in – and the big question, what happens next?
How do you see the state of play in the presidential and senate races?
“The polls look good for Jo Biden,” John Emerson told attendees. “But honestly, I would ignore them. It’s not the winner of the popular vote who wins; it’s the people who can cobble together enough states.” To illustrate how close that contest actually is, he explained that, in 2016, President Trump won Michigan, Wisconsin and Pennsylvania – the traditional ‘Blue Wall’ in the upper Mid-West. The margin was just 65,000 votes across all three states. “If President Trump wins one of these blue-wall states, and everything else he won last time, he is re-elected.”
Frank Kelly agreed it was far from over. Of the various national polls, the Republicans pay particular attention to Trafalgar Group. “Trafalgar Polling was correct in 2016”, said Kelly “and it’s got Trump winning in Michigan, and tied in Pennsylvania.”
What is the market telling us?
“If you have a recession and a bear market in an election year, the incumbent tends to lose”, explained Deepak Puri.
However, at the same time, he said “the stock market is positive around 5.2% since August 3, and if you see a positive stock market performance in the three months before an election, that’s about an 80% predictor for the incumbent.”
Of the other established market indicators, “Volatility, the VIX, is up, the dollar has been declining, and rates are going up,” Puri said. “So of the 6 broad measures, 5 out of 6 are going for Biden right now.”
What are the prospects for a contested result?
The answer from the panel: very likely. “You’re going to see lawsuits”, said John Emerson. “You’ll probably see people taking to the streets, and there will be volatility in the markets.”
He added that the issue is not mail fraud though. “The challenge is authenticating the legitimacy of the mail-in ballots,” he said. “What happens is you have to sign the outside of your envelope. The first step for the election authorities is to validate that signature against one they have from when you registered to vote. Now, sometimes people’s signatures change. Maybe they sign their name in the wrong place. Or maybe they print their name. The problem with vote by mail is not fraud. It’s the invalidation of ballots. Historically as many as 1% of mail-in ballots are invalidated. That could be nearly a million votes. That’s what the fight will be about.”
However, Emerson added the key is not to overreact: “At the end of the day the courts will rule, the ballots will be counted, the election will be certified. And probably by mid-December, which is when the Electoral College has to actually vote, we will know who the next President of the United States is.”
How do you position portfolios against this backdrop?
“You want to keep your emotions in check,” said Deepak Puri. The key is to focus on what we know. “The fact that the Fed is trying to build a long-term case for equities is a known fact,” said Puri. “They have kept the yields to a significantly low level. So that brings a very strong case for having risk in your portfolios.”
All three panel members agreed we have seen a de-coupling of the election and market performance, with Emerson pointing to far more influential factors driving the market like the timing of a COVID-19 vaccine, and whether the Federal Reserve will keep interest rates lower for longer and pump liquidity into the system. “These things are going to impact earnings, which clearly drive the market I think much more significantly than whether there is greater regulation on extractive industries or on financial institutions; or whether the corporate tax goes to 28% or not.”
“It’s better to look at the knowns” Puri summed up, “rather than trying to forecast the election and the reaction of the market to that outcome and construct a portfolio. Those kinds of portfolio construction methodologies historically haven’t really done too well.”
What will U.S. relationships abroad look like beyond the election?
Inevitably, the first relationship discussed was that with China. Frank Kelly said that, in a real shot across the bows, we saw Joe Biden recently coming out and very assertively talking about how the United States was allied with Taiwan. With this in mind, his view is that a Biden policy towards China would be “a continuation – perhaps with some variation” to where Trump is now.
He added, “the big, big winner I see out of this, regardless of who’s sitting in the White House, is India.”
With the U.S.-China relationship remaining adversarial, one of the deepest impacted areas is likely to be the tech industry, argued Puri. “China has had some dependencies over the years: market was one, technology was another. In the last four or five years, they have become self-reliant on a lot of technology.” The result is that Western – and particularly U.S. – tech companies are going to get hit in two ways. “You’re going to lose China as a customer” said Puri, “and then Chinese tech companies are now your competitors. So you’re gaining a competitor and you’re losing market.”
On the U.S. relationship with the EU, John Emerson made the point that Joe Biden is an internationalist. Under a Biden administration we would likely see the U.S. re-joining international agreements and multilateral organisations such as NATO. But on the area of trade, “the difference is a difference in degree, not kind.”
Is there a risk of another super currency taking the dollar’s place?
Finally, a question from the floor suggested that there has been a retreat of U.S. political leadership on the global stage and asked what risk that potential power vacuum might pose to the dollar as the global reserve currency?
“Usually, the very basic premises of a currency is the supply and demand. How much supply there is in the market, and what’s the demand,” said Puri. “That is where the dollar comes right up front out of any of the other major G7 currencies. Even with the QE that’s going on and the fiscal stimulus, which might entail more spending and printing of money, the demand for U.S. dollars far exceeds the supply that goes into the marketplace.” Whatever happens in November, “the long-term prognosis would be very much in favor of the continuation of the dollar.”