With a too-close-to-call US election on the horizon in November, Amundi CIO Vincent Mortier (pictured) believes it is more important than ever for fund managers to be alert to global factors when dealing with market-moving events.
“I was in the banking industry for 20 years at a global level. I worked through various crises, including the Asian debt crisis in 1997. What lessons have I learned? Firstly, so many things are more connected than you might think. You cannot only focus on one asset class, one country, or one market.
“You need to understand the global picture and all the dynamics at play. In order to understand what the risks and opportunities are in one market, it’s very important to understand the wider picture,” he says.
“That’s something I really try to share with my portfolio managers, in particular those who have a narrow focus in terms of only stock-picking in one country.
“We saw it over the summer in the links between the VIX, the dollar-yen carry trade, and the Japanese equity market. These three things were fully correlated, so you cannot ignore them.”
US election narrative
On the US election next month, Mortier says there is a narrative developing that, whatever the outcome, it will be positive for the US equity market.
He says that if Trump wins, the market expects big tax cuts and tariffs which could benefit US corporates.
“With the memory the market has of eight years ago, it’s easy to say that Trump’s policies are good for business.
“It’s good for US corporates, so it will be good for the stock market. That’s a short simplification, but it’s a narrative. Then with Kamala Harris, the reasoning is that she might be a little bit less pro-business, but she’s not at all against big tech. That’s positive for mega caps.
“Secondly, she does not have an orthodox programme in terms of public finances. She has never said that she would look to reduce the deficit, meaning fiscal spending should continue. That will benefit corporates, the consumer will be supported, and the positive loop will continue.”
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He adds that there is a belief that the Congress will either be split or won by the opposing side to the newly-elected president, which has historically been good for business as disruptive policies usually do not get passed.
“Overall, the general view seems to be that, whatever the outcome, it doesn’t really matter for equity markets. I think that narrative is a little bit short-sighted or simplistic, because we also need to look at the rate market, which can be disrupted by certain policies.
“Typically, if you put on big tariffs, it will bring back higher inflation. If you continue to have outsized fiscal spending and increase the issuance of debt, the bond market will need to pay a price for it, then rates can come under pressure to the upside in that context. Currently, it’s not obvious that the US economy is ready to support long-term higher rates.
“We have reasons to believe that there are underlying weaknesses in the US consumer which will be very difficult to solve and will take time. The reality of the strength of the US consumer is not what the market is wanting to believe. In the US, a third of households have no money because they are on credit, you have a third on top of that who have actually lost purchasing power since Covid, and so they have exhausted their savings.”
Impact of tariffs
Mortier is also concerned over the impact of tariffs on the global economy. Current president Joe Biden has ramped up tariffs on goods including Chinese electric vehicles over the last year, while Trump has been vocal about imposing further measures should he win in November.
“In history, if you go back multiple years or even centuries, I think there is a clear case that tariffs are never positive for the global economy,” Mortier says.
“It’s positive short term for some countries, but long term, it’s not good for the economy. There are always losers and winners, but the losers outweigh the winners.
“There has been short-term growth in many countries through the rise of protectionism. The narrative of Trump is to say that tariffs will bring money to the government, it will protect US corporates and they will be able to rebuild industry. That’s very, very short-term profit for the state.”
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However, he questions whether the US has the workforce to build the domestic capacity to replace imports in the long run.
“It depends on the sector, but it’s not certain in many areas. Secondly, if the effect of tariffs is a big hit to growth in other countries which are partners of the US, it won’t be good for the US either.
“The impact of tariffs, of course, will be more important for exporters to the US and for the US itself. To start with, China will be the most hit, Europe as well. We have assessed that if Trump moves ahead with his proposal, which is quite hardcore, it could halve Chinese growth, and it can also shave 1% off of the GDP growth of Europe per year.
“As a result, Europe could be in a recession, and China could have sub-par growth compared to its potential. It’s a game where, at the end of the day, you will have more losers than winners. That’s why we are monitoring it, because it can be a very adverse scenario. I can see the political narrative, but the economic rationale is pretty poor.”
