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At the time of writing, there is total suspense about the outcome of the US presidential election. All possible conclusions, including those of the conspiracy theorists, are in circulation. If all goes well, we will have a clear result. Because if we do not, it is clearly the worst scenario for the markets, that of a very tight result, subject to contestation, legal proceedings, multiple vote recounts and even riots across the country. In this scenario, risky assets will clearly not react well. 

A Trump re-election favours the greenback, even if we still believe that it is premature anyway to expect a massive de-basement of one of the major developed currencies against its peers. Debasement has started at this point, but against real assets, not against other paper currencies, as everyone is monetising the cost of the pandemic response to varying degrees from various starting points. A paper currency crisis will occur later, when a country eventually reaches the limits of monetising its public deficits. We are still a long way from this point; in fact, we can barely get out of austerity. Yet, if Mr Trump wins a second mandate, growth stocks, particularly high-growth stocks, are expected to maintain their multi-year leadership.

 

If, on the other hand, the ‘blue wave’ breaks over America, we can expect the first exploitable rally in cyclical and US small-cap stocks to begin in years. The first conclusion, therefore, is not to position ourselves ‘risk on’ or ‘risk off’ depending on the winner – if we have one – but rather to remain faithful to our preference for real assets at the expense of nominal claims, while adapting somewhat the composition of equity allocations according to the speed at which we go into a full-fledged MMT regime (i.e. Modern-Monetary-Theory-inspired macroeconomic policy mix). More fundamentally, the underlying structural trends in the economy and society will persist beyond the tenant who will occupy the oval office for the next four years. Same destination, slightly different journey.

Secular outlook update preview
Structural trends in the economy and in our societies are precisely what we seek to identify and exploit in the Julius Baer Secular Outlook, which we update once a year at this time of the year. Last week, we therefore met as we do every autumn – however this time virtually due to Covid-19 – to analyse these important trends with the help of external experts. As a reminder, this is a very useful exercise. It is about understanding the direction in which socio-economic forces act and their consequences for asset classes over the next few years. Critically, we believe that the neo-liberal era born in the early 1980s with Margaret Thatcher and Ronald Reagan is over. We have entered the era of state-sponsored capitalism. Ironically, the country that emerges victorious from the pandemic practices by far the most successful form of state-sponsored capitalism, and I am talking about China. On the other hand, we are slowly but surely losing free financial markets, i.e. those governed by supply and demand from predominantly private actors who want to maximise their profits.

This is an extract of the ’CIO Weekly’. If you want to learn more about our investment approach, get in touch with us.