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