The wonderful Ian Leslie highlighted last week a great little paper by academic James Crabtree which I think is well worth reading. Its premise – “U.S. allies have grown comfortable with Trump and his tough approach to China—and are anxious about a Biden victory.” You can read it here : https://foreignpolicy.com/2020/09/10/trump-biden-asia-credibility-problem/?fbclid=IwAR2Jc1SxzQTiKcQQJSjmn8SdyAeFCcsVDm0sCvTIHLvweTkK9Rj9Eyl0zeU
The big reveal here is that there are actually plenty of people outside of the US who are hoping for a Trump win. And let’s be honest here – there are also a large number of people INSIDE the US who are also hoping for a Trump victory. We Europeans may be horrified by Trump and think that Biden is someone ‘normal’ but we have to face facts : there’s a growing chance that Trump will get re-elected. That’s certainly what the betting markets are telling us and precisely because Trump has chosen to make law and order his signature non policy, every outrage (two cops in LA shot in their car) just adds fuel to that fire. Personally I can’t bear to think that Trump will win again and I put the probability of that happening below 50% – probably around 45% – but I have growing sense of fear that I’m wrong.
Anyway, the point here is that plenty of people in Asia are perfectly happy with Trump and worried by Biden. On that theme the table below from analysts at SocGen is interesting. It shows how either a Trump/Biden victory might play out for emerging markets.
And on the subject of Emerging Markets, its surprising how cautious the SG analysts are on future prospects:
- “Limited policy options: Emerging market central banks and fiscal authorities have delivered unprecedented amounts of policy stimulus this year, but scope for further policy accommodation may be dwindling.
- Running on fumes: EM now sorely lacks a compelling impetus for investment, with growth drivers weak and yield compensation low. Increasingly, EM is running on fumes, suggesting downside risks exceed upside potential
- Asset allocation: To the year end, we are bullish sovereign credit, bearish duration in local currency bonds, and modestly bearish FX. Into 2021, sovereign credit spreads should start to widen, with a continuation of higher local bond yields and weaker FX.
- FX: EM currencies are running on empty without capital inflows or a resounding macro narrative. We maintain our contrarian bearish EM currency view, with DM outperforming EM, and CEE outperforming within the EM complex.
- Rates: Duration has performed very well since March, but the tank is empty for the long bond trade (average yields should rise from here).
- Sovereign credit: The credit rally may be running on fumes; sovereign spreads could tighten to year end but should widen in 2021 alongside corporate spreads.
- Africa: Selective opportunities for yield and diversification. There is still gas in the tank for Egypt and Ghana FX and rates, but Nigeria is running on empty.”
Back here in the UK some of our comrades on the left are rubbing their hands with gloom and despair as Brexit rears its ugly head again – and CoVid rates spike upwards. Some have even suggested that our economic decline is terminal, and we will soon be an emerging market if we carry on this way. The spectre of Argentina (ruined by Peronista socialists) looms large. The chart below adds grist to the mill and is from analysts at DWS. It reminds us that whatever your view of the desirability of the Brexit, the UK /Europe economic gap over the last few years is tangible and real. All that uncertainty has had a real-world impact.
But even if we accept this gloomy logic, sooner or later the pain must surely start to lessen? One could argue that a Hard Brexit has the (illusory in my view) sense of “getting all the bad shit out the way in the next few months”. And if Covid does spike up in those next few months, we should be able to look forward to a much better 2021#, unless of course we are mid way through an Argentinian style slow decay !
Which is all a way of saying that you can’t have your cake and eat it. If you believe that UK assets deserved a discount for uncertainty – Brexit and Covid – once these have started sliding down the agenda, you can’t then ignore the potential for a rebound. I personally happen to think that Brexit has been painful, and that the government hasn’t handled Covid well, but I also think that the UK is cheap relative to all other DM assets. That discount is probably deserved for now, but I think by some point in 2021 it will be undeserved. Put simply you can accept a critique of our national policies whilst also thinking that it might get better in the future.
This echoes a line from a report last month issued by Tosca fund and written by their economist Dr Savvas Savouri. The kickoff for his analysis is his exasperation with the K scenario which bleeds through into a very gloomy analysis for the UK labour market. In simple terms, this line of attack is that we’re all doomed come November as we enter a jobs meltdown. According to Dr Savouri, “Yes, parts of the UK labour market’s private side will suffer job losses, not however its – admittedly smaller – public sector. Far from it in fact, with large parts of the latter set to see their headcount grow, and do so by popular demand as it were. Moreover, whilst elements of the private sector will indeed suffer permanent job losses, far from all of it will.” The first set of charts below spell out what I think is a perfectly defensible argument – that after the late Autumn spike, employment will recover sharply.
A key part of this positive argument is that we’re all victims of a composition fallacy argument. We see whole sectors laying off employees like crazy and we forget a) that most of the economy hasn’t been hugely impacted in employment terms and b) some have drastically increased employment. The Tosca economist points to a good example – jobs in old London finance may have flatlined or even be heading down but new jobs in the new finance sector have increased. Yes, a few high profile fintechs have laid off staff but they are a minority. Net net, once we combine the sectors, employment in London has INCREASED.
As Dr Savouri argues “ We should in fact bear in mind that whilst London’s ‘conventional’ finance office jobs have recorded little to no growth (red in chart 9), work in e-finance and all that goes to create it, has grown strongly across The Capital (blue in chart 9). Let us not forget to work into our calculations those entirely new jobs born out of this crisis, some admittedly temporary, but a number set to become a permanent feature of the labour market”.
One other key argument is that there are a large number of older, wealthier citizens out there ready and able to spend a great deal more money when Covid starts diminishing. He’s also picked up something I’ve noted. If the UK is such a terrible place why is it that immigration rates remain so high, and why is it that we are currently seeing such a rush of international students into our HE sector? “Be in no doubt that even once outside of this, the UK will continue with a significant positive net-human inflow (c.250,000 per annum). The motivation of many of those arriving will be the desire to study, whilst other will seek to work here. The vast majority of readers will recognise the former can only be good for the UK’s labour market – students from beyond the EU, particularly China, for the most part are not the type to need part-time jobs to fund themselves but very much generous customers”. Add it all up and the jobs market may recover strongly in 2021 and all that extra savings will be deployed en masse, helped along by all those immigrants.
In this scenario – an optimistic one I grant you – one could easily envisage a very strong bounce back in the UK economy in 2021. That could in turn feed through into a strong bounce back in UK focused stocks (and a big rebound in UK inflation!) Personally, I’d put the chances of that happening at around 45%. Unfortunately, the next few months are more likely to be rather grim, with Covid concerns swirling and the US election casting a shadow over the markets.