Speaker 1: Hello and welcome us citizens. Go to the polls on
Speaker 1: November eight in an election that is being closely watched
Speaker 1: around the world. Can Democrats hold both the house and
Speaker 1: the Senate despite President Joe Biden's low approval ratings. All
Speaker 1: will Republican nominees. Many backed by former President Donald Trump
Speaker 1: cause a red wave in both houses.
Speaker 1: I'm Jonathan pierce from the money mine team and we're
Speaker 1: talking about the five things you need to know about
Speaker 1: the U. S. Midterm elections and how the results could
Speaker 1: impact markets and investment decisions. In Asia we have with
Speaker 1: us Angela Mancini a partner with control risks and Vasu Menon,
Speaker 1: executive director for investment strategy at OcBC Bank. I guess
Speaker 1: for both of you, the first question would be how
Speaker 1: have the U. S.
Speaker 1: Midterm elections traditionally impacted global markets? And will we likely
Speaker 1: see the same impact this time around? Or does it
Speaker 1: feel different now
Speaker 2: without fail? Since 1950? In all 18 midterm elections, we've
Speaker 2: had the S. And P. 500 stage a nice comeback
Speaker 2: and a nice rally. So give you an idea. In
Speaker 2: the 2018 midterm elections. The S. And P. 500 index
Speaker 2: bottomed somewhere around december of that year
Speaker 2: And subsequently in the next 12 months it staged a 37%
Speaker 2: appreciation
Speaker 2: on average. If you go back to mid term elections
Speaker 2: dating back to 1950 you find that the subsequent 12
Speaker 2: months after the midterm elections, the SNP find gains have
Speaker 2: averaged about 15%. So that's something for investors to look
Speaker 2: forward to. But of course, 2023 is going to be
Speaker 2: quite different. The Federal Reserve is still fighting its battle
Speaker 2: against inflation interest rates are likely to hit higher recession
Speaker 2: concerns are still there some of these concerns could potentially
Speaker 2: initially overtake the up cycle post midterm elections.
Speaker 2: But if you look at it the other way, this
Speaker 2: concerns have been the market for a long time and
Speaker 2: they could pick possibly in the first or second quarter
Speaker 2: of next year, in which case the money that's sitting
Speaker 2: on the sidelines could come back into the markets and
Speaker 2: help market stage a nice rally in 2023.
Speaker 1: I think this midterm election is being watched more closely
Speaker 1: internationally than in the
Speaker 2: past. A top
Speaker 1: Question we're getting from clients is around political violence. So indeed,
Speaker 1: some of the fringe groups that we saw in the
Speaker 1: run up to January six during January six
Speaker 1: groups are still around. The difference is there's not been
Speaker 1: a call to arms of those groups from any sitting politician,
Speaker 1: so we're not seeing that as a huge risk, as
Speaker 1: we might have seen in the past. But the question,
Speaker 1: of course, is around more broadly what might happen with
Speaker 1: a divided Congress. So what we're looking at now is
Speaker 1: most likely the republicans would take the House and the
Speaker 1: Senate is 50 50. In fact, one of our analyst
Speaker 1: said this is as close to 50 50 as they've
Speaker 1: ever seen. But what we expect is at least one
Speaker 1: body of kong
Speaker 1: gris would change political control. We've seen this before, this
Speaker 1: means there's not a lot to get done in Congress.
Speaker 1: We might see some implications for fiscal policy as it
Speaker 1: relates to fights over the debt limit as it relates
Speaker 1: to potentially letting spending programs expire. But this then means
Speaker 1: that there's going to be less ability for the Congress
Speaker 1: to pass any legislation relating to spending programs. And that
Speaker 1: makes the US Fed take an even more important role
Speaker 1: as it relates to the U. S. Economy.
Speaker 1: Well, the economy and inflation have topped all the recent
Speaker 1: polls on what is foremost on voters minds as they
Speaker 1: head into the election. If the democrats lose one of
Speaker 1: both houses, Vasu would that have a negative impact on markets?
Speaker 2: The market is actually like a gridlock government? Because markets
Speaker 2: feel that that sort of gridlock reduces uncertainty. The risk
Speaker 2: of extreme left wing or right wing political moves. So
Speaker 2: if there's one party that is firmly entrenched in power,
Speaker 2: it is risky because it's possible that party in power
Speaker 2: could have a blank check to
Speaker 2: undertake extreme policies. For example, in the case of biden,
Speaker 2: he's talked about increasing the corporate tax rate, capital gains tax,
Speaker 2: income tax rate and other moves that are not exactly
Speaker 2: market friendly. If biden's party, the Democratic Party has a
Speaker 2: strong hold over the U. S. Government. In other words,
Speaker 2: they win both the house and the Senate with a
Speaker 2: decent majority,
Speaker 2: then, you know, some of these market practices that are
Speaker 2: not very friendly could come into play. But with the gridlock,
Speaker 2: the republicans will keep the democrats in check prevent them
Speaker 2: from doing anything too crazy. And the markets like that.
Speaker 2: So historically look at the markets markets and perform the
Speaker 2: best when you have a gridlock, you have a nice rally.
Speaker 2: If there's a gridlock because the markets then feel that
Speaker 2: the regulators policymakers who are not in government then have
Speaker 2: a free hand to do what's necessary to help the
Speaker 2: economy and push it along.
Speaker 1: So surprisingly, a gridlock. Government may be a good thing
Speaker 1: for markets. Now, Angela, what else could we expect to
Speaker 1: see if the republicans take the House and the president
Speaker 1: loses his full control of both houses.
Speaker 2: So
Speaker 1: what then tends to happen is number one, the president
Speaker 1: typically in the last two years of a presidency, we
Speaker 1: see it, they tend to turn more to foreign policy issues.
Speaker 1: So what we might see there is president biden trying
Speaker 1: to shore up alliances in Asia even further. Even more
Speaker 1: international agreements on things. You might see an increase in military,
Speaker 1: to military cooperation, a real press for international diplomacy, particularly
Speaker 1: as it relates to Asia
Speaker 1: and kind of dealing with the US china tension. So
Speaker 1: we might see a move more towards that as it
Speaker 1: relates to international relations and international policy, but domestically we
Speaker 1: would expect a pretty landlocked economic situation. And then the
Speaker 1: challenge there would be if you did have more investigations
Speaker 1: into the biden administration coming from a divided Congress that
Speaker 1: also just severely limits the capacity of the biden administration
Speaker 1: to handle
Speaker 1: the economic crisis that may come along. As we know,
Speaker 1: we've got inflation. We're looking at a potential recession. It
Speaker 1: just really stops the presidential administration in the cabinet from
Speaker 1: being able to handle things as much as they would
Speaker 1: do if they're wrapped in investigations. So in this scenario,
Speaker 1: the U. S. Government becomes deadlocked and it will have
Speaker 1: difficulty pushing through any economic policies. What happens then
Speaker 2: if you have a gridlock government, then what happens is
Speaker 2: the Fed becomes the only place in town that can
Speaker 2: be something that's positive for the markets because then the
Speaker 2: Fed does not have to deal with fiscal policy. You've
Speaker 2: seen what happened in England, for example, when the government
Speaker 2: announced the excessive fiscal policy, excessive stimulus, the markets intricate
Speaker 2: barrel and this post headaches for the Bank
Speaker 1: of England. So
Speaker 2: similarly, I think from the Fed's standpoint, they're fighting inflation.
Speaker 2: They also do not want the government to undertake too
Speaker 2: aggressive fiscal policy at this juncture. So a gridlock will
Speaker 2: prevent the biden administration from doing anything that could stimulate
Speaker 2: the economy excessively. It helps to focus on fighting inflation.
Speaker 2: And if the Fed succeeds in fighting inflation and brings
Speaker 2: it down significantly, then it's possible that the Fed could
Speaker 2: pivot to a more dovish stance. And that could set
Speaker 2: the stage for the market to see a nice rally
Speaker 2: in 2023, probably not the first half of 2023. This
Speaker 2: is more a story probably for the second half of 23.
Speaker 2: But of course this is contingent on the Fed being
Speaker 2: successful in taming inflation. The Fed will be able to
Speaker 2: do a better job without interference from the government.
Speaker 2: Having said that, bear in mind that the Fat is
Speaker 2: an independent body, its monetary policy decisions do not need
Speaker 2: the endorsement of Congress. The Fat is not funded by
Speaker 2: the U. S. Congress. Its funding comes from the born
Speaker 2: yields that it owns. So essentially the fat is not
Speaker 2: indebted to the U. S. Congress and therefore has a
Speaker 2: free hand in doing things. But nevertheless, if we have
Speaker 2: a Democratic Party firmly in power that could complicate the
Speaker 2: Fed's job because fiscal policy could interfere in what the
Speaker 2: Fed does.
Speaker 1: So the Fed would have free rein to direct economic
Speaker 1: policy with the US government that's deadlocked. But are there
Speaker 1: other concerns in that scenario? Angela.
Speaker 2: One
Speaker 1: interesting point is that as it relates to the economic
Speaker 1: situation in the states and have divided Congress, we have
Speaker 1: issues around fiscal policy but then we have issues also
Speaker 1: specifically around the debt limit. And so that is always
Speaker 1: a contentious issue. And if we have a situation where
Speaker 1: Congress is divided, there's a concern that republicans could hold
Speaker 1: the presidential administration hostages that were in negotiating. If we
Speaker 1: can
Speaker 1: raise the debt limit or not? Why does that matter?
Speaker 1: Because if you don't raise the debt limit, there's a
Speaker 1: concern the US defaults and that's a huge financial problem there.
Speaker 1: Why does that matter internationally? Well, if you remember back
Speaker 1: in 2013, President Obama was meant to come out to
Speaker 1: Asia in the midst of the quote unquote pivot to
Speaker 1: Asia for the Apec meetings. He was also on his
Speaker 1: way to see President Putin in Russia to talk about
Speaker 1: Syria issues and he had a can
Speaker 1: cancel that trip whole cloth to stay home to deal
Speaker 1: with fighting over the debt limit. So a lot of
Speaker 1: people might say that's a U. S. Domestic economic issue.
Speaker 1: We're not really following closely. But it does severely stymie
Speaker 1: the US president from being able to get on with
Speaker 1: things international. And there's a lot of criticism in Asia
Speaker 1: at the time that President Obama had to just cancel
Speaker 1: things right in the middle of a big push towards Asia.
Speaker 1: Here's what we've been talking about so far. Midterm election
Speaker 1: years have traditionally seen higher volatility but also have a
Speaker 1: track record of market returns. The upcoming polls could bring
Speaker 1: a divided government but markets actually like gridlock because it
Speaker 1: reduces uncertainty. It also means that the Fed gets free
Speaker 1: rein to direct economic policy.
Speaker 1: Now, I guess one big question for our listeners is
Speaker 1: while U. S. Elections and politics are interesting, why should
Speaker 1: we in Asia be concerned about it? How could the
Speaker 1: results actually impact our part of the world
Speaker 2: when the U. S. Sneezes? AsIA can potentially catch a cold.
Speaker 2: AsIA is very closely linked to the US very dependent
Speaker 2: on the U. S. The U. S. Is a major
Speaker 2: export market. For example for Asia 67% of the imports
Speaker 2: in the U. S. Comes from Asia.
Speaker 2: So Asia is a very significant component of the U. S. Imports.
Speaker 2: It has a big linkage to the U. S. Of
Speaker 2: course capital
Speaker 1: flows as well. If
Speaker 2: the US dollar strengthen significantly that will hurt ASIA because
Speaker 2: Asian currencies will weaken. This will result in important inflation
Speaker 2: in Asia, it will create headaches for the central banks
Speaker 2: in Asia they'll have to increase interest rates quite significantly.
Speaker 2: They will have to dip into the reserves to defend
Speaker 2: their currencies. What happens in the US
Speaker 2: in terms of the economy in terms of the stock market,
Speaker 2: in terms of interest rates, in terms of the U. S.
Speaker 2: Currency will eventually trickle back down to Asia because ASIA's
Speaker 2: in some ways a mirror image of what happens in
Speaker 2: the US and what happens there has an impact on
Speaker 2: what happens here. And many Asian investors have also got
Speaker 2: significant investments in the U. S. Equity markets. So if U. S.
Speaker 2: Equity markets are down sharply because of a recession there
Speaker 2: will be a wealth effect on Asia as well.
Speaker 1: And then the other issue of course is as it
Speaker 1: relates to asian businesses. I mean we're again working with
Speaker 1: a lot of clients thinking how might things look going
Speaker 1: forward and what we're saying to them is we may
Speaker 1: be in a situation now where you think it's the
Speaker 1: new normal and what we have in front of us
Speaker 1: might be the way of the trajectory of your businesses
Speaker 1: you're able to export into the U. S. Or as
Speaker 1: supply chains. Look for you around the globe vis a
Speaker 1: vis the U. S.
Speaker 1: But we may have a much more turbulent us going forward.
Speaker 1: So we may again, as we're looking at scenarios for
Speaker 1: 2024 if we have a situation where the US becomes
Speaker 1: an unreliable actor for governments and businesses that could be
Speaker 1: quite significant. Again, looking in Asia here as an Asian
Speaker 1: government or ASian businesses to have a more unreliable, unpredictable
Speaker 1: actor for things like investment,
Speaker 1: for things like military to military cooperation or for things
Speaker 1: like trade agreements and some of the alliance building that's
Speaker 1: been going on for the past couple of years and
Speaker 1: that's impacting countries like Australia, Japan and south Korea. So
Speaker 1: that's something to really watch and see how things play
Speaker 1: out in the states and why that's important for folks
Speaker 1: sitting here in Asia, last question to you, how should
Speaker 1: investors manage their portfolios in the current economic environment
Speaker 2: I think, you know, in the short term the headwinds
Speaker 2: are very much their inflation interest rates recession.
Speaker 2: Those concerns are still playing out for the markets to
Speaker 2: really have a significant bottom. You need to see inflation
Speaker 2: roll over. You need to see the fat private too
Speaker 2: dovish stance. And you need to see recession concerns appropriately
Speaker 2: priced into the markets. You have none of this at
Speaker 2: this juncture so the markets could potentially see more downside
Speaker 2: more volatility because these uncertainties have to clear.
Speaker 2: But bear in mind that the markets have already seen
Speaker 2: more than 20% correction. Now, if you cast your mind
Speaker 2: back to the early 19 eighties when paul Volcker was
Speaker 2: the Federal Reserve Chief and he was seen as one
Speaker 2: of the most aggressive Federal Reserve Chiefs, he hiked interest
Speaker 2: rates in the U. S. From 10% Fed fund rate
Speaker 2: to 20% Fed fund rate, that was a very significant increase.
Speaker 2: And during that period the U. S. Economy went into
Speaker 2: recession and S. And P. 500 index actually corrected 27%
Speaker 2: over 21 period. We've already seen more than 20% correction
Speaker 2: in the S. And P. 500 index. So on that
Speaker 2: basis it would give you an idea that we're not
Speaker 2: that far from the bottom. And if you look at
Speaker 2: post World War two, bear markets, the average decline in
Speaker 2: the S. And P. 500 index has been about 33 34%.
Speaker 2: We're now down about 24%. So we're not that far
Speaker 2: away unlikely we'll see another 20% downside for the current level.
Speaker 2: So the basic message to investors is we have already
Speaker 2: seen a very sharp correction. We might see further downside.
Speaker 2: But the downside will probably not be as significant as
Speaker 2: what we've seen in the last 12 months. It is
Speaker 2: not the time to be too negative on the markets.
Speaker 2: Op
Speaker 2: opportunities often emerge in such dark times. Volatility is a
Speaker 2: two sided coin. It represents risk as well as opportunities. Historically,
Speaker 2: bear markets tend to be much shorter than bull markets.
Speaker 2: So if you cast your mind back to the 19 eighties,
Speaker 2: the bear market lasted 20 months and the S. And P.
Speaker 2: 500 index fell 27%.
Speaker 2: But when paul walker started to ease monetary policy, we
Speaker 2: saw the SNP final index really 220% over a five
Speaker 2: year period. So investors do not want to be too
Speaker 2: negative for investors who are looking to invest in markets.
Speaker 2: The best approach right now is to number one stay diversified.
Speaker 2: I know it sounds relatively boring. Too many investors but
Speaker 2: I think it's a good advice to stay diversified, not
Speaker 2: take consideration better and more impor
Speaker 2: certainly time diversify in other words, spread your investments out
Speaker 2: over the next perhaps six months to nine months by
Speaker 2: gradually on dips or dollar cost average because it's almost
Speaker 2: impossible to time and pick the bottom, but we know
Speaker 2: that the dark clouds will eventually give way to clearer skies.
Speaker 2: Bluer skies. There's a lot of money sitting on the
Speaker 2: sidelines in the U. S. For example for
Speaker 2: $6 trillion in money market fund sitting on the sidelines
Speaker 2: waiting for an opportunity that's almost a record high in
Speaker 2: terms of money market funds and that money could go
Speaker 2: to work once the presses the pause button inflation rolls
Speaker 2: over and recession fears start to recede and we could
Speaker 2: see a very quick rebound which will then fulfill the
Speaker 2: post midterm election rally that we've historically seen.
Speaker 1: Well historically markets have always rallied after a midterm election.
Speaker 1: Markets tend to prefer a gridlock government in a gridlock
Speaker 1: government scenario. The US president may turn his focus to
Speaker 1: his international agenda including more emphasis on china and Asia.
Speaker 1: A gridlock scenario also means the US Fed will have
Speaker 1: free rein to direct economic policies and rein in inflation.
Speaker 1: And investors need to stay invested and diversified because there
Speaker 1: are substantial market money funds sitting on the sidelines waiting
Speaker 1: for an opportunity choose themes that will pay off in
Speaker 1: the long run.
Speaker 1: And that's the five things you need to know about
Speaker 1: the U. S. Midterm elections and its impact on Asia
Speaker 1: and now leaves you to thank my guests Angela Mancini,
Speaker 1: a partner with control risks and Vasu Menon executive director
Speaker 1: for investment strategy at OcBc. Bank
Speaker 1: money. Mine ads every saturday at 10 30 PM on
Speaker 1: media cops. C. N. A. You can also catch us
Speaker 1: online at CNN dot asia or on youtube.