WEBVTT - 5 things you need to know about the US midterm elections | EP 25

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<v Speaker 1>Hello and welcome us citizens. Go to the polls on

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<v Speaker 1>November eight in an election that is being closely watched

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<v Speaker 1>around the world. Can Democrats hold both the house and

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<v Speaker 1>the Senate despite President Joe Biden's low approval ratings. All

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<v Speaker 1>will Republican nominees. Many backed by former President Donald Trump

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<v Speaker 1>cause a red wave in both houses.

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<v Speaker 1>I'm Jonathan pierce from the money mine team and we're

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<v Speaker 1>talking about the five things you need to know about

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<v Speaker 1>the U. S. Midterm elections and how the results could

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<v Speaker 1>impact markets and investment decisions. In Asia we have with

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<v Speaker 1>us Angela Mancini a partner with control risks and Vasu Menon,

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<v Speaker 1>executive director for investment strategy at OcBC Bank. I guess

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<v Speaker 1>for both of you, the first question would be how

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<v Speaker 1>have the U. S.

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<v Speaker 1>Midterm elections traditionally impacted global markets? And will we likely

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<v Speaker 1>see the same impact this time around? Or does it

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<v Speaker 1>feel different now

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<v Speaker 2>without fail? Since 1950? In all 18 midterm elections, we've

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<v Speaker 2>had the S. And P. 500 stage a nice comeback

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<v Speaker 2>and a nice rally. So give you an idea. In

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<v Speaker 2>the 2018 midterm elections. The S. And P. 500 index

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<v Speaker 2>bottomed somewhere around december of that year

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<v Speaker 2>And subsequently in the next 12 months it staged a 37%

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<v Speaker 2>appreciation

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<v Speaker 2>on average. If you go back to mid term elections

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<v Speaker 2>dating back to 1950 you find that the subsequent 12

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<v Speaker 2>months after the midterm elections, the SNP find gains have

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<v Speaker 2>averaged about 15%. So that's something for investors to look

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<v Speaker 2>forward to. But of course, 2023 is going to be

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<v Speaker 2>quite different. The Federal Reserve is still fighting its battle

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<v Speaker 2>against inflation interest rates are likely to hit higher recession

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<v Speaker 2>concerns are still there some of these concerns could potentially

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<v Speaker 2>initially overtake the up cycle post midterm elections.

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<v Speaker 2>But if you look at it the other way, this

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<v Speaker 2>concerns have been the market for a long time and

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<v Speaker 2>they could pick possibly in the first or second quarter

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<v Speaker 2>of next year, in which case the money that's sitting

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<v Speaker 2>on the sidelines could come back into the markets and

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<v Speaker 2>help market stage a nice rally in 2023.

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<v Speaker 1>I think this midterm election is being watched more closely

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<v Speaker 1>internationally than in the

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<v Speaker 2>past. A top

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<v Speaker 1>Question we're getting from clients is around political violence. So indeed,

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<v Speaker 1>some of the fringe groups that we saw in the

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<v Speaker 1>run up to January six during January six

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<v Speaker 1>groups are still around. The difference is there's not been

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<v Speaker 1>a call to arms of those groups from any sitting politician,

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<v Speaker 1>so we're not seeing that as a huge risk, as

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<v Speaker 1>we might have seen in the past. But the question,

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<v Speaker 1>of course, is around more broadly what might happen with

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<v Speaker 1>a divided Congress. So what we're looking at now is

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<v Speaker 1>most likely the republicans would take the House and the

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<v Speaker 1>Senate is 50 50. In fact, one of our analyst

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<v Speaker 1>said this is as close to 50 50 as they've

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<v Speaker 1>ever seen. But what we expect is at least one

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<v Speaker 1>body of kong

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<v Speaker 1>gris would change political control. We've seen this before, this

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<v Speaker 1>means there's not a lot to get done in Congress.

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<v Speaker 1>We might see some implications for fiscal policy as it

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<v Speaker 1>relates to fights over the debt limit as it relates

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<v Speaker 1>to potentially letting spending programs expire. But this then means

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<v Speaker 1>that there's going to be less ability for the Congress

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<v Speaker 1>to pass any legislation relating to spending programs. And that

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<v Speaker 1>makes the US Fed take an even more important role

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<v Speaker 1>as it relates to the U. S. Economy.

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<v Speaker 1>Well, the economy and inflation have topped all the recent

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<v Speaker 1>polls on what is foremost on voters minds as they

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<v Speaker 1>head into the election. If the democrats lose one of

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<v Speaker 1>both houses, Vasu would that have a negative impact on markets?

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<v Speaker 2>The market is actually like a gridlock government? Because markets

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<v Speaker 2>feel that that sort of gridlock reduces uncertainty. The risk

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<v Speaker 2>of extreme left wing or right wing political moves. So

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<v Speaker 2>if there's one party that is firmly entrenched in power,

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<v Speaker 2>it is risky because it's possible that party in power

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<v Speaker 2>could have a blank check to

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<v Speaker 2>undertake extreme policies. For example, in the case of biden,

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<v Speaker 2>he's talked about increasing the corporate tax rate, capital gains tax,

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<v Speaker 2>income tax rate and other moves that are not exactly

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<v Speaker 2>market friendly. If biden's party, the Democratic Party has a

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<v Speaker 2>strong hold over the U. S. Government. In other words,

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<v Speaker 2>they win both the house and the Senate with a

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<v Speaker 2>decent majority,

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<v Speaker 2>then, you know, some of these market practices that are

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<v Speaker 2>not very friendly could come into play. But with the gridlock,

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<v Speaker 2>the republicans will keep the democrats in check prevent them

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<v Speaker 2>from doing anything too crazy. And the markets like that.

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<v Speaker 2>So historically look at the markets markets and perform the

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<v Speaker 2>best when you have a gridlock, you have a nice rally.

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<v Speaker 2>If there's a gridlock because the markets then feel that

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<v Speaker 2>the regulators policymakers who are not in government then have

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<v Speaker 2>a free hand to do what's necessary to help the

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<v Speaker 2>economy and push it along.

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<v Speaker 1>So surprisingly, a gridlock. Government may be a good thing

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<v Speaker 1>for markets. Now, Angela, what else could we expect to

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<v Speaker 1>see if the republicans take the House and the president

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<v Speaker 1>loses his full control of both houses.

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<v Speaker 2>So

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<v Speaker 1>what then tends to happen is number one, the president

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<v Speaker 1>typically in the last two years of a presidency, we

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<v Speaker 1>see it, they tend to turn more to foreign policy issues.

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<v Speaker 1>So what we might see there is president biden trying

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<v Speaker 1>to shore up alliances in Asia even further. Even more

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<v Speaker 1>international agreements on things. You might see an increase in military,

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<v Speaker 1>to military cooperation, a real press for international diplomacy, particularly

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<v Speaker 1>as it relates to Asia

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<v Speaker 1>and kind of dealing with the US china tension. So

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<v Speaker 1>we might see a move more towards that as it

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<v Speaker 1>relates to international relations and international policy, but domestically we

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<v Speaker 1>would expect a pretty landlocked economic situation. And then the

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<v Speaker 1>challenge there would be if you did have more investigations

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<v Speaker 1>into the biden administration coming from a divided Congress that

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<v Speaker 1>also just severely limits the capacity of the biden administration

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<v Speaker 1>to handle

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<v Speaker 1>the economic crisis that may come along. As we know,

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<v Speaker 1>we've got inflation. We're looking at a potential recession. It

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<v Speaker 1>just really stops the presidential administration in the cabinet from

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<v Speaker 1>being able to handle things as much as they would

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<v Speaker 1>do if they're wrapped in investigations. So in this scenario,

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<v Speaker 1>the U. S. Government becomes deadlocked and it will have

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<v Speaker 1>difficulty pushing through any economic policies. What happens then

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<v Speaker 2>if you have a gridlock government, then what happens is

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<v Speaker 2>the Fed becomes the only place in town that can

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<v Speaker 2>be something that's positive for the markets because then the

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<v Speaker 2>Fed does not have to deal with fiscal policy. You've

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<v Speaker 2>seen what happened in England, for example, when the government

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<v Speaker 2>announced the excessive fiscal policy, excessive stimulus, the markets intricate

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<v Speaker 2>barrel and this post headaches for the Bank

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<v Speaker 1>of England. So

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<v Speaker 2>similarly, I think from the Fed's standpoint, they're fighting inflation.

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<v Speaker 2>They also do not want the government to undertake too

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<v Speaker 2>aggressive fiscal policy at this juncture. So a gridlock will

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<v Speaker 2>prevent the biden administration from doing anything that could stimulate

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<v Speaker 2>the economy excessively. It helps to focus on fighting inflation.

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<v Speaker 2>And if the Fed succeeds in fighting inflation and brings

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<v Speaker 2>it down significantly, then it's possible that the Fed could

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<v Speaker 2>pivot to a more dovish stance. And that could set

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<v Speaker 2>the stage for the market to see a nice rally

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<v Speaker 2>in 2023, probably not the first half of 2023. This

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<v Speaker 2>is more a story probably for the second half of 23.

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<v Speaker 2>But of course this is contingent on the Fed being

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<v Speaker 2>successful in taming inflation. The Fed will be able to

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<v Speaker 2>do a better job without interference from the government.

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<v Speaker 2>Having said that, bear in mind that the Fat is

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<v Speaker 2>an independent body, its monetary policy decisions do not need

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<v Speaker 2>the endorsement of Congress. The Fat is not funded by

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<v Speaker 2>the U. S. Congress. Its funding comes from the born

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<v Speaker 2>yields that it owns. So essentially the fat is not

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<v Speaker 2>indebted to the U. S. Congress and therefore has a

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<v Speaker 2>free hand in doing things. But nevertheless, if we have

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<v Speaker 2>a Democratic Party firmly in power that could complicate the

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<v Speaker 2>Fed's job because fiscal policy could interfere in what the

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<v Speaker 2>Fed does.

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<v Speaker 1>So the Fed would have free rein to direct economic

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<v Speaker 1>policy with the US government that's deadlocked. But are there

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<v Speaker 1>other concerns in that scenario? Angela.

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<v Speaker 2>One

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<v Speaker 1>interesting point is that as it relates to the economic

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<v Speaker 1>situation in the states and have divided Congress, we have

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<v Speaker 1>issues around fiscal policy but then we have issues also

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<v Speaker 1>specifically around the debt limit. And so that is always

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<v Speaker 1>a contentious issue. And if we have a situation where

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<v Speaker 1>Congress is divided, there's a concern that republicans could hold

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<v Speaker 1>the presidential administration hostages that were in negotiating. If we

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<v Speaker 1>can

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<v Speaker 1>raise the debt limit or not? Why does that matter?

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<v Speaker 1>Because if you don't raise the debt limit, there's a

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<v Speaker 1>concern the US defaults and that's a huge financial problem there.

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<v Speaker 1>Why does that matter internationally? Well, if you remember back

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<v Speaker 1>in 2013, President Obama was meant to come out to

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<v Speaker 1>Asia in the midst of the quote unquote pivot to

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<v Speaker 1>Asia for the Apec meetings. He was also on his

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<v Speaker 1>way to see President Putin in Russia to talk about

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<v Speaker 1>Syria issues and he had a can

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<v Speaker 1>cancel that trip whole cloth to stay home to deal

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<v Speaker 1>with fighting over the debt limit. So a lot of

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<v Speaker 1>people might say that's a U. S. Domestic economic issue.

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<v Speaker 1>We're not really following closely. But it does severely stymie

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<v Speaker 1>the US president from being able to get on with

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<v Speaker 1>things international. And there's a lot of criticism in Asia

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<v Speaker 1>at the time that President Obama had to just cancel

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<v Speaker 1>things right in the middle of a big push towards Asia.

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<v Speaker 1>Here's what we've been talking about so far. Midterm election

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<v Speaker 1>years have traditionally seen higher volatility but also have a

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<v Speaker 1>track record of market returns. The upcoming polls could bring

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<v Speaker 1>a divided government but markets actually like gridlock because it

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<v Speaker 1>reduces uncertainty. It also means that the Fed gets free

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<v Speaker 1>rein to direct economic policy.

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<v Speaker 1>Now, I guess one big question for our listeners is

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<v Speaker 1>while U. S. Elections and politics are interesting, why should

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<v Speaker 1>we in Asia be concerned about it? How could the

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<v Speaker 1>results actually impact our part of the world

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<v Speaker 2>when the U. S. Sneezes? AsIA can potentially catch a cold.

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<v Speaker 2>AsIA is very closely linked to the US very dependent

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<v Speaker 2>on the U. S. The U. S. Is a major

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<v Speaker 2>export market. For example for Asia 67% of the imports

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<v Speaker 2>in the U. S. Comes from Asia.

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<v Speaker 2>So Asia is a very significant component of the U. S. Imports.

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<v Speaker 2>It has a big linkage to the U. S. Of

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<v Speaker 2>course capital

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<v Speaker 1>flows as well. If

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<v Speaker 2>the US dollar strengthen significantly that will hurt ASIA because

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<v Speaker 2>Asian currencies will weaken. This will result in important inflation

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<v Speaker 2>in Asia, it will create headaches for the central banks

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<v Speaker 2>in Asia they'll have to increase interest rates quite significantly.

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<v Speaker 2>They will have to dip into the reserves to defend

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<v Speaker 2>their currencies. What happens in the US

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<v Speaker 2>in terms of the economy in terms of the stock market,

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<v Speaker 2>in terms of interest rates, in terms of the U. S.

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<v Speaker 2>Currency will eventually trickle back down to Asia because ASIA's

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<v Speaker 2>in some ways a mirror image of what happens in

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<v Speaker 2>the US and what happens there has an impact on

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<v Speaker 2>what happens here. And many Asian investors have also got

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<v Speaker 2>significant investments in the U. S. Equity markets. So if U. S.

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<v Speaker 2>Equity markets are down sharply because of a recession there

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<v Speaker 2>will be a wealth effect on Asia as well.

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<v Speaker 1>And then the other issue of course is as it

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<v Speaker 1>relates to asian businesses. I mean we're again working with

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<v Speaker 1>a lot of clients thinking how might things look going

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<v Speaker 1>forward and what we're saying to them is we may

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<v Speaker 1>be in a situation now where you think it's the

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<v Speaker 1>new normal and what we have in front of us

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<v Speaker 1>might be the way of the trajectory of your businesses

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<v Speaker 1>you're able to export into the U. S. Or as

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<v Speaker 1>supply chains. Look for you around the globe vis a

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<v Speaker 1>vis the U. S.

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<v Speaker 1>But we may have a much more turbulent us going forward.

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<v Speaker 1>So we may again, as we're looking at scenarios for

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<v Speaker 1>2024 if we have a situation where the US becomes

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<v Speaker 1>an unreliable actor for governments and businesses that could be

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<v Speaker 1>quite significant. Again, looking in Asia here as an Asian

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<v Speaker 1>government or ASian businesses to have a more unreliable, unpredictable

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<v Speaker 1>actor for things like investment,

0:11:07.322 --> 0:11:10.372
<v Speaker 1>for things like military to military cooperation or for things

0:11:10.372 --> 0:11:13.172
<v Speaker 1>like trade agreements and some of the alliance building that's

0:11:13.172 --> 0:11:15.162
<v Speaker 1>been going on for the past couple of years and

0:11:15.162 --> 0:11:18.852
<v Speaker 1>that's impacting countries like Australia, Japan and south Korea. So

0:11:18.852 --> 0:11:21.742
<v Speaker 1>that's something to really watch and see how things play

0:11:21.742 --> 0:11:23.712
<v Speaker 1>out in the states and why that's important for folks

0:11:23.712 --> 0:11:26.622
<v Speaker 1>sitting here in Asia, last question to you, how should

0:11:26.622 --> 0:11:30.552
<v Speaker 1>investors manage their portfolios in the current economic environment

0:11:30.652 --> 0:11:32.881
<v Speaker 2>I think, you know, in the short term the headwinds

0:11:32.881 --> 0:11:36.620
<v Speaker 2>are very much their inflation interest rates recession.

0:11:36.840 --> 0:11:39.610
<v Speaker 2>Those concerns are still playing out for the markets to

0:11:39.610 --> 0:11:42.140
<v Speaker 2>really have a significant bottom. You need to see inflation

0:11:42.140 --> 0:11:44.560
<v Speaker 2>roll over. You need to see the fat private too

0:11:44.559 --> 0:11:48.830
<v Speaker 2>dovish stance. And you need to see recession concerns appropriately

0:11:48.830 --> 0:11:51.600
<v Speaker 2>priced into the markets. You have none of this at

0:11:51.600 --> 0:11:55.220
<v Speaker 2>this juncture so the markets could potentially see more downside

0:11:55.230 --> 0:11:57.660
<v Speaker 2>more volatility because these uncertainties have to clear.

0:11:57.673 --> 0:12:01.223
<v Speaker 2>But bear in mind that the markets have already seen

0:12:01.232 --> 0:12:03.723
<v Speaker 2>more than 20% correction. Now, if you cast your mind

0:12:03.723 --> 0:12:06.983
<v Speaker 2>back to the early 19 eighties when paul Volcker was

0:12:06.982 --> 0:12:08.603
<v Speaker 2>the Federal Reserve Chief and he was seen as one

0:12:08.602 --> 0:12:11.463
<v Speaker 2>of the most aggressive Federal Reserve Chiefs, he hiked interest

0:12:11.463 --> 0:12:14.163
<v Speaker 2>rates in the U. S. From 10% Fed fund rate

0:12:14.163 --> 0:12:16.593
<v Speaker 2>to 20% Fed fund rate, that was a very significant increase.

0:12:16.593 --> 0:12:18.493
<v Speaker 2>And during that period the U. S. Economy went into

0:12:18.506 --> 0:12:22.436
<v Speaker 2>recession and S. And P. 500 index actually corrected 27%

0:12:22.446 --> 0:12:26.316
<v Speaker 2>over 21 period. We've already seen more than 20% correction

0:12:26.326 --> 0:12:28.406
<v Speaker 2>in the S. And P. 500 index. So on that

0:12:28.405 --> 0:12:30.936
<v Speaker 2>basis it would give you an idea that we're not

0:12:30.946 --> 0:12:33.036
<v Speaker 2>that far from the bottom. And if you look at

0:12:33.046 --> 0:12:35.936
<v Speaker 2>post World War two, bear markets, the average decline in

0:12:35.936 --> 0:12:39.326
<v Speaker 2>the S. And P. 500 index has been about 33 34%.

0:12:39.620 --> 0:12:42.280
<v Speaker 2>We're now down about 24%. So we're not that far

0:12:42.280 --> 0:12:45.610
<v Speaker 2>away unlikely we'll see another 20% downside for the current level.

0:12:45.610 --> 0:12:48.440
<v Speaker 2>So the basic message to investors is we have already

0:12:48.440 --> 0:12:51.760
<v Speaker 2>seen a very sharp correction. We might see further downside.

0:12:51.770 --> 0:12:53.700
<v Speaker 2>But the downside will probably not be as significant as

0:12:53.700 --> 0:12:55.630
<v Speaker 2>what we've seen in the last 12 months. It is

0:12:55.630 --> 0:12:58.180
<v Speaker 2>not the time to be too negative on the markets.

0:12:58.190 --> 0:12:58.730
<v Speaker 2>Op

0:12:58.785 --> 0:13:03.375
<v Speaker 2>opportunities often emerge in such dark times. Volatility is a

0:13:03.385 --> 0:13:07.795
<v Speaker 2>two sided coin. It represents risk as well as opportunities. Historically,

0:13:07.795 --> 0:13:10.855
<v Speaker 2>bear markets tend to be much shorter than bull markets.

0:13:10.865 --> 0:13:13.295
<v Speaker 2>So if you cast your mind back to the 19 eighties,

0:13:13.304 --> 0:13:15.895
<v Speaker 2>the bear market lasted 20 months and the S. And P.

0:13:15.895 --> 0:13:17.950
<v Speaker 2>500 index fell 27%.

0:13:18.130 --> 0:13:21.110
<v Speaker 2>But when paul walker started to ease monetary policy, we

0:13:21.110 --> 0:13:24.690
<v Speaker 2>saw the SNP final index really 220% over a five

0:13:24.690 --> 0:13:27.110
<v Speaker 2>year period. So investors do not want to be too

0:13:27.110 --> 0:13:30.569
<v Speaker 2>negative for investors who are looking to invest in markets.

0:13:30.580 --> 0:13:33.559
<v Speaker 2>The best approach right now is to number one stay diversified.

0:13:33.570 --> 0:13:36.660
<v Speaker 2>I know it sounds relatively boring. Too many investors but

0:13:36.670 --> 0:13:39.110
<v Speaker 2>I think it's a good advice to stay diversified, not

0:13:39.110 --> 0:13:40.440
<v Speaker 2>take consideration better and more impor

0:13:40.453 --> 0:13:43.892
<v Speaker 2>certainly time diversify in other words, spread your investments out

0:13:43.903 --> 0:13:47.153
<v Speaker 2>over the next perhaps six months to nine months by

0:13:47.153 --> 0:13:51.133
<v Speaker 2>gradually on dips or dollar cost average because it's almost

0:13:51.133 --> 0:13:54.703
<v Speaker 2>impossible to time and pick the bottom, but we know

0:13:54.713 --> 0:13:57.752
<v Speaker 2>that the dark clouds will eventually give way to clearer skies.

0:13:57.763 --> 0:14:00.473
<v Speaker 2>Bluer skies. There's a lot of money sitting on the

0:14:00.473 --> 0:14:02.713
<v Speaker 2>sidelines in the U. S. For example for

0:14:02.776 --> 0:14:05.466
<v Speaker 2>$6 trillion in money market fund sitting on the sidelines

0:14:05.476 --> 0:14:08.856
<v Speaker 2>waiting for an opportunity that's almost a record high in

0:14:08.856 --> 0:14:11.506
<v Speaker 2>terms of money market funds and that money could go

0:14:11.506 --> 0:14:14.946
<v Speaker 2>to work once the presses the pause button inflation rolls

0:14:14.956 --> 0:14:18.336
<v Speaker 2>over and recession fears start to recede and we could

0:14:18.336 --> 0:14:21.436
<v Speaker 2>see a very quick rebound which will then fulfill the

0:14:21.446 --> 0:14:25.246
<v Speaker 2>post midterm election rally that we've historically seen.

0:14:25.256 --> 0:14:29.476
<v Speaker 1>Well historically markets have always rallied after a midterm election.

0:14:30.020 --> 0:14:34.150
<v Speaker 1>Markets tend to prefer a gridlock government in a gridlock

0:14:34.150 --> 0:14:37.340
<v Speaker 1>government scenario. The US president may turn his focus to

0:14:37.340 --> 0:14:41.480
<v Speaker 1>his international agenda including more emphasis on china and Asia.

0:14:42.010 --> 0:14:44.880
<v Speaker 1>A gridlock scenario also means the US Fed will have

0:14:44.880 --> 0:14:48.770
<v Speaker 1>free rein to direct economic policies and rein in inflation.

0:14:49.070 --> 0:14:53.150
<v Speaker 1>And investors need to stay invested and diversified because there

0:14:53.150 --> 0:14:56.920
<v Speaker 1>are substantial market money funds sitting on the sidelines waiting

0:14:56.920 --> 0:15:00.020
<v Speaker 1>for an opportunity choose themes that will pay off in

0:15:00.020 --> 0:15:00.850
<v Speaker 1>the long run.

0:15:01.540 --> 0:15:03.730
<v Speaker 1>And that's the five things you need to know about

0:15:03.730 --> 0:15:07.100
<v Speaker 1>the U. S. Midterm elections and its impact on Asia

0:15:07.110 --> 0:15:10.140
<v Speaker 1>and now leaves you to thank my guests Angela Mancini,

0:15:10.140 --> 0:15:13.890
<v Speaker 1>a partner with control risks and Vasu Menon executive director

0:15:13.890 --> 0:15:16.680
<v Speaker 1>for investment strategy at OcBc. Bank

0:15:17.280 --> 0:15:20.130
<v Speaker 1>money. Mine ads every saturday at 10 30 PM on

0:15:20.130 --> 0:15:22.520
<v Speaker 1>media cops. C. N. A. You can also catch us

0:15:22.520 --> 0:15:25.620
<v Speaker 1>online at CNN dot asia or on youtube.