The presidential election will be the story dominating markets in 2020 making it difficult to be bullish on the US, particularly if Elizabeth Warren’s campaign gathers steam, according to Allianz Global Investors global head of strategy.
Neil Dwane (pictured) predicts the next year in Washington will be the “most toxic we have seen” in terms of rhetoric and debate as candidates, including Donald Trump, Warren and Bernie Sanders, vie for the presidency.
Speaking at a media event, Dwane said: “[The next 12 months] are going to make Brexit and Westminster look like a tea party compared to what may go on in Washington. I think it is going to be fairly unedifying in terms of the tone and quality of the debate.”
He warned if it comes down to Warren versus Trump and markets see Warren winning, they will have to start pricing in her policies. But he said a Warren-led administration would be “pretty evil for the S&P”.
Since Trump’s inauguration on 20 January 2017, the S&P 500 has delivered a total return of 34.7%, compared with 27.4% for the MSCI World and 15.3% for the FTSE All-Share, according to FE Fundinvest.
The stocks that would suffer under Warren
Warren has been rising in the polls since August and has gained momentum since the Democrats launched an official impeachment inquiry against Donald Trump in September. She has vowed to go after big banks, big pharma and big tech companies, and is an advocate of Medicare for all and banning fracking.
Dwane said: “She hates big energy, big banks, private equity, wants to break up big tech, wants to give healthcare for free, which means that probably the healthcare stocks will have to pay for it.”
Warren has previously described herself as “a capitalist to my bones”.
Her campaign website says she wishes to empower workers through “accountable capitalism”. This includes raising the minimum wage to $15 hourly, defending defined benefit (DB) pensions and reinstating the fiduciary rule, allowing workers to vote for a set number of directors on the boards of large companies, and strengthening collective bargaining and the right for workers to strike.
Dwane added: “From us in the UK, Warren looks perfectly normal. She looks less radical than Jeremy Corbyn, but by American standards, this is heart attack territory. This is not what they have ever seen, this pivot to the left. So, I think that’s why we have to watch this from a global market perspective very carefully.”
Further policies from Warren include stopping the US campaign to support a no deal Brexit, strengthening antitrust laws to break up big tech, and a fresh take on the Glass-Steagall Act that would break up the big banks and re-establish the wall between commercial and investment banking.
US on verge of recession
Dwane also believes the US will enter recession in 2020. Eight of Allianz GI’s US recession monitor indicators are flashing red: the output gap, non-financial corporate debt, industrial production, manufacturing, inventories, consumer expectations gap, Us exports and yield curve.
Allianz GI is particularly concerned by increasing levels of consumer debt in the US.
“Car loan delinquencies are higher than they were in 2008 and credit cards are going through the roof,” said Dwane. “That tends to tell you consumers haven’t got the cash, but they are able to borrow it with such low interest rates. We’re not seeing the housing market being particularly dynamic either.”
Dwane said this makes him nervous about being long risk assets.
“After the markets have rallied 25% and I’m looking at the US economy flashing concern, why do I want to sit there going we’re going up another 20% next year? It’s a big challenge to want to be very bullish on the US next year.”
