At BNP Paribas’ Global Markets Americas Conference on May 15th, over 720 attendees, including asset managers, investors and issuers, gathered at Casa Cipriani in New York City. During a day of insightful panelist discussions and one-on-one conversations, clients heard from a succession of influential industry leaders and former policy makers about how to prepare for paradigm shifts in the political, economic and fiscal landscape that will likely affect markets in 2024 and beyond.
Speakers included eight high profile Chief Investment Officers and asset managers; three former Federal Reserve presidents; well-known journalists and veteran political analysts; a former Speaker of the House of Representatives and a former U.S. senator.
The key market drivers discussed included the Fed’s likely response to a stronger than expected U.S. economy, the outcome of the U.S. election in November, global fiscal imbalances, and the sustainability of U.S. exceptionalism. Despite prevailing uncertainties, speakers had a very positive near-term view of the markets across asset classes, citing the U.S. federal stimulus funds left to spend, the extremely healthy cash position of U.S. corporates, and the best environment for fixed income investors in decades.
U.S. exceptionalism could be waning
Looking back at this time last year, the U.S. economy appeared to be heading for a recession, but the AI boom and federal stimulus for the sustainable energy transition have fueled a period of sustained growth instead. For example, AI is already assisting with the construction of investment portfolios, Cliff Asness, Co-Founder of AQR Capital Management, said during a fireside chat. “If you’re a quant in good standing, you can’t not pursue brand new statistical techniques wholeheartedly,” he said, explaining that training machine learning models on a vast amount of corporate data had made evaluating corporate statements much more accurate.
However, it is uncertain how long U.S. exceptionalism will continue. Speakers explained that growth in European and emerging markets has returned and the strength of the U.S. dollar may have peaked, while the currency’s trade-weighted strength makes overseas investments compelling. “The U.S. is like the magnificent barbell. We have technology, commodities and energy, all in one country,” said GSAM’s Ashish Shah, during a session on CIO instant insights. However, he added that investors had already priced a lot of that in, and from a risk return perspective, there were now lots of growth opportunities outside the country too, pointing out that supply chain diversification is pushing new manufacturing investment into India, Japan and Mexico.
Managing a soft landing
Although the most recent data shows that inflation is subsiding, most speakers thought that the Fed will not cut rates until September and further rate cuts in 2024 look unlikely. During a monetary policy deep dive with Jim Bullard, former President of the Federal Reserve Bank of St. Louis; Charles Evans, former President and CEO of the Federal Reserve Bank of Chicago; and Esther George, former President and CEO of the Federal Reserve Bank of Kansas City; Evans said that the Fed was likely to have trouble instituting more than one rate cut this year, while George predicted there would be none.
George added that a soft landing for the U.S. economy was not assured. “However good the policy steps have been until now for a soft landing, I think we can not rule out that the information gets more complicated, so I think that being ready for a range of scenarios at this time is the right thing to do,” she said.
This point was also raised during a discussion about the top macro, equity, credit and emerging market trade ideas for the rest of 2024, featuring Pramol Dhawan, Head of Emerging Markets at PIMCO; Tom Walsh, Co-Head of Investment Grade at BlackRock; Mike Masters, Founder and CEO at Masters Capital Management; and Sophia Drossos, Economist and Strategist at Point 72. Speakers on the panel expressed concern that U.S. growth could be lower than anticipated and that stagflation was still a risk.
A golden age for fixed income
On the upside, U.S. corporate credit fundamentals are strong, volatility is low, and investors can achieve high returns without taking extension risk, so fixed income strategies will remain appealing this year if rates stay at or near their current levels. One senior fund manager described this year as “the golden age of fixed income”.
Preparing for unpredictable U.S. elections
Speakers agreed that elections for the Presidency and both houses of Congress this November are all too close to call, with third party candidates and the large number of voters that dislike both presidential candidates increasing the unpredictability of the results.
Amy Walter, Publisher and Editor-in-Chief of the Cook Political Report with Amy Walter, said that another cause of uncertainty was voter ideology. She pointed out that ideology was now as much of a consideration for voters as traditional issues, like the strength of the economy. “While peace and prosperity are still very important, it doesn’t determine absolutely everything,” she said. “Identity drives a lot of the vote in a way that it didn’t before”.
With the 2017 tax cuts expiring next year and the possibility of changes to the Inflation Reduction Act, the CHIPS and Science Act, AI regulation and immigration policy in play, the result of November’s elections could rearrange the current growth engines within the U.S. economy. This is likely to impact investor priorities much more than modest interest rate cuts by the end on the year, according to one Chief Investment Officer. With the outcome of the Presidential and Congressional elections so uncertain, how the candidates perform in the newly announced presidential debates, and how voters’ views evolve on the economy, immigration and abortion, will be critical.
Fiscal imbalances have far-reaching implications
Fiscal spending in the U.S., Europe and emerging nations will continue for the foreseeable future and the resulting fiscal imbalances around the world present a serious challenge. In the U.S., the consensus view at the conference was that fiscal spending will increase, irrespective of which party wins the November elections. Federal spending on interest payments is forecast to exceed defense spending this year and speakers agreed that there is no political appetite from either party to tackle debt reduction before other key policy initiatives.
This makes it harder for the Fed to control inflation and will inform the direction of interest rates. “I think the Fed and other central banks are largely impotent with such a large fiscal spend,” said Greg Peters, Co-Chief Investment Officer at PGIM Fixed Income. “The fiscal dominance story is the story. The Fed is just along for the ride and trying to adjust on the fly.”
The size of the deficit also has other far-reaching implications for markets, including a weakening of the U.S. dollar, which has been bolstered to date by U.S exceptionalism. “As a financial community, we’re not good at figuring out the public sector balance sheet, and especially not in the world’s reserve currency,” said one senior fund manager. “I think that ultimately the dollar is going to have to weaken.”
If there was one overarching takeaway for clients from a packed afternoon of programing, it was that while the market has been focused recently on inflation and the Fed’s likely response to this for the remainder of 2024, structural political, economic and fiscal shifts will increasingly drive investment flows and market performance in the coming years.
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