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How could the US elections affect the world economy?
Is history repeating itself in 2024? Donald Trump is facing off against Joe Biden again for the US presidency. Meanwhile supply chains and inflation appear to be normalising after the impacts of Covid and the Ukraine war. In an even bigger throwback to the past, the world also seems to be splitting into rival geopolitical blocs.
Yet just because we have seen similar versions of these events before, it does not mean the path that lies ahead for the world this year is in any way certain. That was the view shared by all of the speakers at our latest “Rethink Perspectives” event in London.
“The economic environment appears moderately healthy – but can geopolitics get in the way?” asked Samy Chaar, our Chief Economist, in his opening macroeconomic overview, while our guest speaker Justin Webb, BBC Radio 4 Today programme presenter and the broadcaster’s former North America Editor, suggested “the possibility of short-term chaos” if Biden or Trump win.
Macroeconomics vs geopolitics
“We’ve started to see economic variables return to long-term norms over the past six months following three years of disruption,” said Chaar in his opening analysis of the macroeconomic environment. “But could the heated geopolitical environment, with high-stakes elections, extend this disruption into 2024 and 2025?”
Current geopolitical tensions have so far had limited impact on global economic activity, with broad-based improvements in economic performance across industries and regions, according to Chaar. The unrest in the Middle East has affected shipping but not to an extent anything close to the pandemic, with supply chains and delivery times “basically normal”, he added.
Yet “bloc logic” is leading the West and China to delink their supply chains. Foreign direct investment is shifting markedly away from China and heading into India, Indonesia, Brazil, Mexico, Poland and Turkey, Chaar pointed out. We can expect tariffs on China – “tariffs on everyone” – if Donald Trump wins the White House, Chaar added.
The effects of this will ripple around the world, as could any Republican moves to restrict migration policy. This could tighten US labour markets and push up wages, sending inflation back in an upwards direction, Chaar suggested. Migration may even tighten under the Democrats, Webb suggested, with Biden seeing a clampdown as a way to try and win voters over.
Potential tax cuts in the US could also have implications for inflation and interest rates that would alter decision-making around the globe. The US public is already “consuming like there’s no tomorrow”, while their EU counterparts are saving rather than spending, Chaar said.
Investing in a world of electoral uncertainty
“We live in a geopolitical world and there’s no getting away from Uncle Sam,” said Michael Strobaek, Global Chief Investment Officer for the Private Bank, during his deep dive on Lombard Odier’s investment views. Investors need to think not short-term but to be focussed on long-term future growth and follow a strategic asset allocation in their porfolios, he added.
For the first time in years, bonds are offering 4-5% returns, meaning that investors have many attractive alternatives to equities, Strobaek said. But in a world where equities are at all-time highs and US tech stocks are reaching new records, the key decision facing investors who don’t want to miss out is what level of risk appetite they have and what level of equity exposure they want.
Questioning whether the surge of the “Magnificent Seven” tech stocks is a bubble, Strobaek said he did not think so. “This is an artefact of a post-pandemic world. Tech firms have become dominant because of the need for telecom and home office software. This year for tech is all about AI. Tech has become a geostrategic weapon in our fractured world.”
Read also: IT’s about valuations
Our new strategic asset allocation and “total wealth” approach involve a combination of liquid and private assets for eligible investors, with Strobaek describing the latter as “important for long-term total returns”. Private assets can play an important role in diversifying portfolios from publicly-listed assets, for long-term investors who are willing to forfeit some liquidity and who have an appropriate risk tolerance. They are also currently benefitting from secular tailwinds, including banks stepping back from some forms of lending and firms staying private for longer. We see opportunities here and favour multi-year investments across a range of private assets, with a focus on identifying, and accessing, the strongest managers.
How far will interest rates fall in 2024?
Markets have sharply revised down their expectations for interest rate cuts this year. Consensus predicts three US rate cuts, and we currently expect four cuts of 25 basis points in 2024 for the US and the European Central Bank, beginning in the middle of this year.
“We’re in a new normal,” Strobaek said. “Because of inflation, interest rates are back. We’ve not seen this since the 2008 financial crisis. This materially changes way to think about asset allocation.”
The equity risk premium has been compressed as a result and is now lower than historical averages, with risk-free debt instruments such as bonds offering better returns than they have for over a decade.
But Mr. Trump has made it clear that he does not want an independent president of the Federal Reserve, Webb pointed out, adding that his plans for office this time round are far more organised than they were in 2020.
Economies in fighting mode
“There is greater fiscal velocity in the United States economy than anywhere else in the world,” according to Chaar. But he says the entire world is “back in fighting mode” after several difficult years. This means governments are investing in their economies, such as through the Inflation Reduction Act in the US, which is building resilience for the country’s economy. EU governments are responding to this and trying to create their own resilience – partly to try and keep up, but partly also in preparation for what a Trump administration might mean for US relationships with the world.
Read also: Ten Investment Convictions for 2024 | Lombard Odier
Questioned by the audience about what would make Lombard Odier reconsider its tactical overweight in US stocks, both Chaar and Strobaek answered with “sticky inflation”. History may appear to be partly repeating itself, but as Frédéric Rochat, Managing Partner at Lombard Odier, pointed out at the beginning of the London Rethink Perspectives event, we have always adapted to the world throughout our more than 225-year history.
Monitoring not just the US but also the many other elections taking place around the world in 2024 will be a critical part of the Bank’s thinking this year, and you can visit our new Elections page to keep up to date with all our insights into the implications of these votes.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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