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Client Update - 10th November 2023

What goes up, must come down? Bond investors are certainly hoping so as the attraction of this investment to our portfolios is predicated on the basis that the next move for interest rates will be down. We now have a situation where all four systemically important central banks — the Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB) and the US Federal Reserve (Fed) — have paused their rate rising progress, for now. It must be noted that all four central banks coupled a decision to maintain unchanged interest rates with an open door to the possible resumption of increases down the line.

Even if this may now be the high point for rates, central banks dare not announce this yet as they have got so much so wrong in recent years. All four central banks need to supplement their often-repeated “data dependency” with a clearer, forward-looking characterisation of the economic context and unless they can do that, they will not be able to restore credibility and enhance accountability. On the surface, all four central banks now have time to assess the impact of their past actions and internalise more data. While the data is largely going their way, the BoE, ECB, and Fed feel that they still need to get a good handle on the cumulative effects of their aggressive hikes and tighter conditions in the market.

As we see rays of hope in the bond market, clouds gather in the US as Bidens re-election campaign has started to look precarious, whereas Trumps hope for a return to power seems to be gaining momentum, despite (or because of?!) him being absent for much of the initial electioneering.

This week President Joe Biden tried to explain the phrase he hopes will kick start his bid for re-election next year. “Folks, ‘Bidenomics’ is just another way of saying the American dream,” was his chosen line. One year out from an election that many analysts believe could be a defining moment in the country’s history, Biden is persistently behind in the polls and under growing pressure within his party. Over the weekend David Axelrod, who was chief strategist for Barack Obama’s presidential campaigns, suggested it might not be “wise” for Biden to even run in 2024, in part because of his age. Yet Biden is still pressing ahead with a re-election bid and is betting everything on his personal economic blueprint. In recent months, he has embraced the term Bidenomics to promote his ambitious agenda, which is rooted in trillions of dollars’ worth of public investments and a focus on middle-income workers. Biden insists his policies represent a decisive break from 40 years of “trickle-down economics [which] limited the American dream to those at the top”. Worryingly for Biden and his Democratic party, voters remain overwhelmingly downbeat on the US economy — and place the blame squarely on him. Even if the US is doing better than most of its peer economies, ordinary Americans do not feel that way about their living standards.

That leaves Biden vulnerable to attacks from Republicans, who relentlessly accuse him of leaving Americans worse off. About two-thirds of Americans polled said their household expenses had risen over the past year, and only a quarter said their incomes had increased during the same period. Most worryingly for Biden, a New York Times/Siena poll, published this week, found that just 19 per cent of voters in the battleground states that are likely to determine the outcome of next year’s presidential election — Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin — said economic conditions were “good” or “excellent”. Just 37 per cent of those in swing states said they trusted Biden over his likely Republican opponent, Donald Trump, to do a better job on the economy.

What could the main headlines be if Trump returns? The regulatory tightening in banking probably comes to a screeching halt. Since the banking mini crisis in March, the move to impose tougher requirements for total capital and long-term debt financing has shifted into high gear. But the implementation will not be before 2025 — just in time for Trump-appointed regulators to backpedal furiously. Then there are the industrial companies that are investing in green energy and upgrades to the power grid on the back of Biden’s Inflation Reduction Act (IRA) that need long-term certainty around the tax incentives in the 2023 law. Trump is a nationalist and a populist and will spend and cut taxes without restraint. This could well drive inflation expectations back up and bond prices down. The only question is whether the bond market starts pricing this in next year or waits to see if Trump is elected.

In summary then, we are seeing more opportunities in the bond markets, but we are very aware that threats to this opportunity remain and can quickly build. This is, however, what tends to make a good investment. It is often too late to invest once all issues have been resolved and threats have passed. Our investment team’s job is to pick the moment to start building a position, sized accordingly on the risk return trade-off on offer, keep building the position as opportunities arise and then make sure we leave before the party ends. This could be a matter of months or years, and this is what makes investing such an interesting part of what we do. Do have a good weekend.

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