What we’re watching in 2024 elections
Market take
Weekly video_20240610
Christian Olinger
Opening frame: What’s driving markets? Market take
Camera frame
Globally, over half the population is voting this year!
Voters are expressing frustration about many issues, but notably the rising cost of living. We don’t see incumbent leaders or challengers offering bold solutions – and high public debt somewhat ties their hands.
Title slide: What we’re watching in 2024 elections
1: U.S. fiscal deficit
The U.S. fiscal deficit is expected to remain historically large, with no major tax rises or spending cuts that could change this trajectory.
The deficit reinforces persistent inflation and bolsters our high-for-longer rate view. We see investors demanding more compensation for the risk of holding long-term U.S. bonds as a result.
2: Tracking policy changes
Trump’s more protectionist stance and Biden’s current protectionist policies may boost inflation pressures in any outcome.
Tighter immigration policies may be inflationary as the U.S. faces a shrinking working-age population. We remain focused on the U.S. Inflation Reduction Act and its incentives tied to the low-carbon transition. If Republicans control Congress, they may revise or repeal parts of the legislation to fund tax cuts.
Outro: Here’s our Market take
We stay overweight U.S. stocks for now and eye key policy areas of the presidential election. On a strategic horizon, we like government bonds in the euro area and UK over the U.S.
We are also tracking elections in India, Mexico, the European Union and the UK. For more details, read our weekly market commentary.
Closing frame: Read details:
www.blackrock.com/weekly-commentary.
We stay overweight U.S. stocks ahead of the election yet are cautious on bonds given the fiscal outlook. We focus on long-term positives in India and Mexico.
U.S. stocks notched fresh highs last week and are up nearly 13% this year. The Bank of Canada and European Central Bank cut interest rates as most expected.
All eyes are on the Federal Reserve meeting this week. We see the Fed on hold in coming months even as other central banks start to trim policy rates.
Over half the world's population goes to the polls in 2024. We watch for investment implications. We think governments and candidates have limited solutions to key financial issues for voters. We stay overweight U.S. stocks before the U.S. election yet cautious on long-term U.S. Treasuries. No matter who wins, budget deficits are set to stay large. Elections in India and Mexico sparked market volatility, but we focus on long-term positives. A July UK election supports our UK gilts preference.
Persistently large
Average U.S. fiscal deficit as a share of GDP, 1960-2034
Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from the U.S. Congressional Budge Office, May 2024. Notes: The chart shows the average U.S. fiscal deficit as a share of GDP between 1960-1999, 2000-2019 and as projected for 2024-2034.
Global voters are expressing frustration about many issues but notably the rising cost of living. Yet we see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands. In November, U.S. President Joe Biden will face former President Donald Trump. Under both, pandemic borrowing swelled fiscal deficits – the shortfall in government revenue versus spending. No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits. See the chart. These deficits reinforce persistent inflation and our view that the Federal Reserve will need to keep rates high for longer. We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term U.S. bonds.
We track potential changes on U.S. trade, immigration and energy policy – and see a potential inflation boost no matter who wins. On trade, Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods. Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls. Major changes to legal immigration during a second Trump or Biden administration would have implications for inflation as the U.S. faces a shrinking working-age population. On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.
Elections around the globe
It’s already been a busy election year. In India, Prime Minister Narendra Modi secured a third term to lead the government but will need coalition support after failing to win a majority last week. That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalizing economy. Mexico’s election saw the ruling coalition score a resounding win that points to continuity. We see both India and Mexico benefiting from a rewiring of global supply chains. Though in Mexico, a new president and government rolling out broad reforms could weaken institutional checks and balances. Even as right-wing and populist parties performed well in the European Union elections, centrist parties are expected to keep overall control of the European Parliament. Yet the performance of governing parties will have repercussions, such as President Emmanuel Macron calling a snap election in France after his party suffered a big loss.
The UK votes in early July rather than in late 2024 as originally expected. A decisive victory for one party could create the political breathing space to address the UK’s structural issues, such as weak productivity growth. Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds.
Our bottom line
We stay overweight U.S. stocks for now and eye the key policy areas of the presidential election. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.
Market backdrop
U.S. stocks notched fresh highs last week and are up nearly 13% this year. The Bank of Canada and the European Central Bank both cut rates for the first time since the start of pandemic. Markets are focused on how far central banks can cut rates – and are now split on whether the Fed will cut once or twice this year after the strong U.S. payroll gains last week. We don’t see these rate cuts as the start of a cycle of multiple cuts given sticky inflation holding above central bank targets.
All eyes are on the Fed policy meeting this week. We expect key data – like last week’s U.S. payrolls and this week’s U.S. CPI – to drive Fed decision-making. Even with easing likely on the horizon for the Fed and already underway elsewhere, this is not your typical rate-cutting cycle, in our view. The red-hot U.S. payroll data reinforces what an unusual environment this is for the start of a global easing cycle. We don’t see central banks cutting far and fast.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of June 6, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
UK payroll data
Fed policy decision; U.S. CPI; UK GDP
U.S. trade data; University of Michigan consumer sentiment survey
China total social financing
Read our past weekly market commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, June 2024
Reasons | ||
---|---|---|
Tactical | ||
U.S. equities | Our macro view has us neutral at the benchmark level. But the AI theme and its potential to generate alpha – or above-benchmark returns – push us to be overweight overall. | |
Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like short-term bonds and are now neutral long-term U.S. Treasuries as we see two-way risks ahead. | |
Geographic granularity | We favor getting granular by geography and like Japan stocks in DM. Within EM, we like India and Mexico as beneficiaries of mega forces even as relative valuations appear rich. | |
Strategic | ||
Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk. | |
Fixed income granularity | We prefer inflation-linked bonds as we see inflation closer to 3% on a strategic horizon. We also like short-term government bonds, and the UK stands out for long-term bonds. | |
Equity granularity | We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like Mexico, India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook. |
Note: Views are from a U.S. dollar perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.
Asset | Tactical view | Commentary | ||||
---|---|---|---|---|---|---|
Equities | ||||||
United States | Benchmark | We are neutral in our largest portfolio allocation. Falling inflation and coming Fed rate cuts can underpin the rally’s momentum. We are ready to pivot once the market narrative shifts. | ||||
Overall | We are overweight overall when incorporating our U.S.-centric positive view on artificial intelligence (AI). We think AI beneficiaries can still gain while earnings growth looks robust. | |||||
Europe | We are underweight. While valuations look fair to us, we think the near-term growth and earnings outlook remain less attractive than in the U.S. and Japan – our preferred markets. | |||||
U.K. | We are neutral. We find attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to fight sticky inflation. | |||||
Japan | We are overweight. Mild inflation and shareholder-friendly reforms are positives. We see the BOJ policy shift as a normalization, not a shift to tightening. | |||||
Emerging markets | We are neutral. We see growth on a weaker trajectory and see only limited policy stimulus from China. We prefer EM debt over equity. | |||||
China | We are neutral. Modest policy stimulus may help stabilize activity, and valuations have come down. Structural challenges such as an aging population and geopolitical risks persist. | |||||
Fixed income | ||||||
Short U.S. Treasuries | We are overweight. We prefer short-term government bonds for income as interest rates stay higher for longer. | |||||
Long U.S. Treasuries | We are neutral. The yield surge driven by expected policy rates has likely peaked. We now see about equal odds that long-term yields swing in either direction. | |||||
U.S. inflation-linked bonds | We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | |||||
Euro area inflation-linked bonds | We are neutral. Market expectations for persistent inflation in the euro area have come down. | |||||
Euro area government bonds | We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Widening peripheral bond spreads remain a risk. | |||||
UK Gilts | We are neutral. Gilt yields have compressed relative to U.S. Treasuries. Markets are pricing in Bank of England policy rates closer to our expectations. | |||||
Japan government bonds | We are underweight. We find more attractive returns in equities. We see some of the least attractive returns in Japanese government bonds, so we use them as a funding source. | |||||
China government bonds | We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | |||||
U.S. agency MBS | We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | |||||
Global investment grade credit | We are underweight. Tight spreads don’t compensate for the expected hit to corporate balance sheets from rate hikes, in our view. We prefer Europe over the U.S. | |||||
Global high yield | We are neutral. Spreads are tight, but we like its high total yield and potential near-term rallies. We prefer Europe. | |||||
Asia credit | We are neutral. We don’t find valuations compelling enough to turn more positive. | |||||
Emerging market - hard currency | We are overweight. We prefer EM hard currency debt due to its relative value and quality. It is also cushioned from weakening local currencies as EM central banks cut policy rates. | |||||
Emerging market - local currency | We are neutral. Yields have fallen closer to U.S. Treasury yields. Central bank rate cuts could hurt EM currencies, dragging on potential returns. |
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024
Asset | Tactical view | Commentary | ||
---|---|---|---|---|
Equities | ||||
Europe ex UK | We are underweight. While valuations look fair to us, we think the near-term growth and earnings outlook remain less attractive than in the U.S. and Japan – our preferred markets. | |||
Germany | We are neutral. Valuations remain moderately supportive relative to peers. The earnings outlook looks set to brighten as global manufacturing activity bottoms out and financing conditions start to ease. Longer term, we think the low-carbon transition may bring opportunities. | |||
France | We are underweight. Relatively richer valuations offset the positive impact from past productivity enhancing reforms and favorable energy mix. | |||
Italy | We are underweight. Valuations and earnings dynamics are supportive. Yet recent growth outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years, we think. | |||
Spain | We are neutral. Valuations and earnings momentum are supportive relative to peers. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI. Political uncertainty remains a potential risk. | |||
Netherlands | We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations than European peers. | |||
Switzerland | We are underweight in line with our broad European market positioning. Valuations remain high versus peers. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think. | |||
UK | We are neutral. We find that attractive valuations better reflect the weak growth outlook and the Bank of England’s sharp rate hikes to deal with sticky inflation. | |||
Fixed income | ||||
Euro area government bonds | We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs. | |||
German bunds | We are neutral. Market pricing reflects policy rates broadly in line with our expectations and 10-year yields are off their highs. | |||
French OATs | We are neutral. Valuations look less compelling following pronounced narrowing of French spreads to German bonds. Elevated French public debt and a slower pace of structural reforms remain challenges. | |||
Italian BTPs | We are neutral. The spread over German bunds looks tight given Italy’s recently higher-than-expected deficit-to-GDP-ratio and a trajectory for the debt ratio in the next few years which is stable at best. Other domestic factors remain supportive, with growth holding up well relative to the rest of the euro area. Italian households are also showing a significant willingness to increase their direct holding of BTPs amid high nominal rates and yields. | |||
UK gilts | We are neutral. Gilt yields have compressed relative to U.S. Treasuries. Markets are pricing in Bank of England policy rates closer to our expectations. | |||
Swiss government bonds | We are neutral. The Swiss National Bank has started to cut policy rates given reduced inflationary pressure and the appreciation of the Swiss franc. | |||
European inflation-linked bonds | We are neutral. Market expectations for persistent inflation in the euro area have come down. | |||
European investment grade credit | We are neutral. We maintain our preference for European investment grade over the U.S. given more attractive valuations amid decent income. | |||
European high yield | We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the U.S. Spreads compensate for risks of a potential pick-up in defaults, in our view. |
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, June 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.