BNP Paribas is bringing together senior
investment professionals, policy experts and economists in Markets 360
Unplugged, a series of virtual discussions exploring key themes and trends
across asset classes, the choices ahead, and what these mean for the investment
community.
In a discussion focusing on the next stage
of the equity recovery, quant and equity experts joined moderator Greg Boutle,
US head of equity and derivative strategy at BNP Paribas, to discuss the main
dynamics currently shaping developed market equities. [1]
US election impact
An audience poll found 50% of listeners
believed the upcoming US election would be the most important driver behind
equity market movements during late 2020. One panellist said the election could
yield three potential outcomes. His first scenario – namely a President Trump
victory coupled with a Democrat majority in the House of Representatives –
might result in a brief but significant “risk-on” rally (where stocks are
preferred over bonds) as it would alleviate some of the uncertainties investors
are wrestling with, he said. His second scenario – a Biden presidency, but kept
in check by a Republican-controlled Senate – might also culminate in a brief risk-on
rally as some of the more radical tax, regulation and corporate governance
reforms would most likely be avoided. The panellist also thought a Biden
presidency might lead to a more constructive US dialogue with China, appeasing
global investors further.
Source: BNP Paribas LIVE poll conducted during the Markets360 Unplugged LIVE session
The third and final potential outcome – a
Democrat victory including the executive and both legislative branches of
government – carried a number of risks and opportunities, the panellist commented.
He said industries such as health, energy and financials would see a lot of
change, fuelled by regulatory reform, increased corporation taxation and the
introduction of a higher minimum wage, all of which would be likely to have an
impact on earnings estimates in 2020. Despite these near-term risks, the
panellist argued that now was not the time for investors to sell and move into
cash. There were, he added, a number of potential upsides to a Democrat sweep.
For instance, it could result in a larger and more targeted fiscal stimulus
package, leading to Gross Domestic Product growth and heightened inflation
expectations. This could support attractive opportunities in sectors like
industrials.
In the run-up to the November US elections,
opportunities might also arise in selected equity derivative products. “We have
seen a big kink develop in the term structure of the ‘Vix’ [volatility index]. Elections
have historically not triggered big one-day market movements, although the 2020
race is taking place against a backdrop of uncertainty,” said Boutle.
Is the Federal Reserve out of ammunition? What about the ECB?
On monetary policy, there are growing
market concerns that the Federal Reserve has insufficient ammunition to
mitigate the impact of another exogenous shock to the system. The panellists,
however, argued that the Federal Reserve is not out of ammunition, although its
ability to mitigate a shock fundamentally depends on the nature of the shock.
Panellists said that many of the responses need to be fiscal and regulatory-driven,
but added that there are actions the Federal Reserve can take without resorting
to negative rates. They said it could increase the rate and breadth of its
asset purchase programme. The Federal Reserve has so far avoided explicit yield
curve controls, said one panellist, but that is a tool which is available in
its arsenal.
However,
lessons for the Federal Reserve are available from Europe about what to do if
another crisis strikes when rates are so low. “In our
analysis, we looked at Europe to see what happens when rates are at zero or
in the lower bound region. It is true that the Central Bank support for equity
markets is constrained, but a positive message is that the European Central
Bank (ECB)’s Corporate Sector Purchase Program (CSPP) was supportive of credit
markets and helped mitigate a further widening of credit spreads. It is clear
Central Banks have not run out of tools, but rather they need to change the
target of their implementation tools from RFRs [risk-free rates] to credit
markets,” said Michael Sneyd, head of macro quant and derivative strategy at
BNP Paribas.
Considering the recent stimulus packages
coming out of the United States and Europe, the panellists also explored how
these affect the broader regional allocations toward equities. They agreed that some of the value in
European equities stems from the sector composition across banking, energy, and
autos. In addition, the speakers noted a more aggressive response recently from
the ECB, such as the pooling of sovereign debt, joint issuance of bonds and a
more holistic approach to fiscal stimulus. In the intermediate period, these
breakthrough responses may be catalysts that have been missing from European
equities for a long time, the panellists said.
Source: BNP Paribas LIVE poll conducted during the Markets360 Unplugged LIVE session
Deglobalization continues
The panellists debated whether
de-globalization is likely to accelerate further, a situation that may prove
particularly destabilizing for sectors heavily dependent on global supply
chains, including technology, manufacturing and retail. However, one panellist
said it was possible a number of supply chains could move out of China – owing
to the ongoing political uncertainty – and relocate in other destinations. He
said Mexico could be a net beneficiary of this, especially as labour costs in
the country are now more attractive than those in China. He also warned that political
tensions between the US and China could widen divergences on technology
standards, pointing to the recent discord over 5G.
[1] The
Markets360 Unplugged session was titled ‘The Power of Discount Factors: The
Next Stage of the Equity Recovery.’ The panel was moderated by Greg Boutle, US Head of Equity and Derivative Strategy at BNP Paribas. Speakers included Russ Koesterich, CFA, JD, Portfolio Manager –
Global Allocation at BlackRock; and Michael Sneyd, Head of Macro Quant and
Derivative Strategy at BNP Paribas.
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