Prepare for Election Outcomes: Views from Our Portfolio Managers

With the election just around the corner, investors are preparing for the potential ripple effects across the economy and capital markets. At a high level, CEO Jan van Eck has discussed how large fiscal deficits continue to be, thanks to the boom in government spending. This has contributed to higher for longer inflation and helps explain why the Fed hasn’t been easing.

The Trump and Biden administrations have been large spenders, creating a budget deficit of 7% despite being in an economic boom with low unemployment. Medicare and Social Security deficits are looming, which sets 2025 up to be a critical year for fiscal policy.

To provide investors further guidance on how to manage their portfolios through the remainder of the year, we asked a group of our experienced investment professionals these three questions:

1. How do issues around the election impact your outlook for your asset class?
2. Are there particular indicators investors should be watching closely?
3. What do you view as the biggest risks and opportunities in your space through the end of 2024?

Find below their insights on what to look out for in their respective asset classes.

• Digital Assets: Regulation and De-Dollarization
• Emerging Markets Bond: EM Fiscal Dominance Continues its Reign
• Emerging Markets Equity: Keep an Eye on Trade Intensity
• Gold: Will Demand from Western Investors Return?
• Global Resources: All Eyes on Global Growth
• Fixed Income: Stay on the Short-End of Fixed Income
• Municipal Bonds: Lower Rates Should Help Municipal Borrowers

Digital Assets: Regulation and De-Dollarization

Matthew Sigel, Head of Digital Assets Research

Outlook

The upcoming election will be a pivotal moment for the digital assets space, as fiscal and monetary policies could diverge significantly depending on the administration in power. Digital assets have shown a strong correlation to a weak dollar and money supply growth, making them particularly sensitive to shifts in these areas. Additionally, if Kamala Harris were to retain Gary Gensler as SEC Chair or align closely with the Elizabeth Warren wing of the Democratic Party when it comes to finance policy, we could see a tightening regulatory environment that would likely dampen institutional adoption of digital assets. Conversely, a Trump presidency is generally bullish for the ecosystem, including Bitcoin, Ethereum, and even less mature projects, as it may lead to a more lenient regulatory framework. While Bitcoin and Ethereum, whose regulatory status is clearer, might still thrive under Harris, the broader crypto market would likely face more headwinds.

Indicators to Watch

Investors should closely monitor the actions of central banks, particularly around interest rates and money supply, as these are critical to the liquidity that drives digital asset markets. Additionally, there is a growing trend of countries mining Bitcoin at the government level—seven nations now, with three new entrants this year. This trend is a key indicator of the global shift towards de-dollarization. Russia's pilot of cross-border trade denominated in crypto, for example, raises questions about which nations might follow suit. The implications for Bitcoin are significant, as government-level mining and cross-border crypto transactions could bolster Bitcoin’s role as a global reserve asset, as we wrote about in recent research. As de-dollarization gains momentum, we anticipate more countries and increased governmental involvement in digital assets, especially Bitcoin. Of course, we will also be closely watching institutional inflows or outflows into crypto ETFs, as these can serve as leading indicators of broader market sentiment.

Risks and Opportunities

The biggest risk and opportunity in the digital asset space through the end of the year hinges on the U.S. election, which will set the tone for regulation and institutional adoption for the next four years. Historically, markets tend to be jittery during the uncertainty phase of an election cycle but often rally once the winner is confirmed. We believe the upside is larger for digital assets under a Trump presidency, which might foster a more favorable regulatory environment. Conversely, a Harris victory could present challenges, particularly for projects beyond Bitcoin and Ethereum. However, unless the election outcome is heavily disputed, Bitcoin should benefit as the reality of four more years of potentially reckless fiscal policy solidifies.

Explore more Digital Assets Insights.

Emerging Markets Bond: EM Fiscal Dominance Continues its Reign

Eric Fine, Portfolio Manager, Head of Active Emerging Markets Debt

Outlook

U.S. political developments confirm our longstanding “fiscal dominance” theme that the risks to markets are in developed markets (DM), not emerging markets (EM). In particular, the entire U.S. election process, almost regardless of outcome, will confirm EM political and policy stability relative to DM.

We’ve already seen heightened U.S. political risk in a last-minute change in the Democratic Party’s presidential candidate and an assassination attempt on the Republican candidate. It is not clear that the U.S. election itself will be the end of these risks. These political trends are exhibiting themselves in Europe (UK riots, French and German elections) and Japan, which is also challenged by high debt and a central bank whose independence is being questioned. Juxtapose this against Indonesian, Indian, Mexican, and South African elections this year, which were largely uncontentious and most importantly all saw continuity. Indonesia and Mexico actually saw stronger incumbent parties, with India and South Africa seeing challenges to the incumbent party that still translated into great (arguably greater) economic policy continuity. All these countries adhere to fiscal rules and are backed by largely independent central banks, which were not even part of the political and policy discussion. They had elections, and voters agreed on the things bond markets care about. Not sure that can be said in many DMs.

What this means is more of the same. In our opinion, EM bonds will continue to outperform DM bonds. DMs like the U.S. will face greater fiscal and monetary challenges, EMs less so. Is there really any outcome other than fiscal stimulus and an asset-price focused central bank into an economic downturn following the U.S. elections, regardless of who wins the presidential election? EM central banks, on the other hand, have kept much higher real rates for longer, compared to the U.S., so the inauguration of a Fed cutting cycle should benefit EMs (especially in local currency). Also, part of our “fiscal dominance” theme notes that EMs are important creditors/lenders to DM. When these central banks determine what bonds they want as assets, they have always required high real rates and good fiscal policy. We are not seeing this in DMs like the U.S., though, these central banks are increasingly using EM bonds as assets and decreasingly using DM bonds as assets. A Fed rate-cutting cycle at this stage will only diminish the attractiveness of DM bonds relative to EM.

Indicators to Watch

Stability in the Chinese yuan (CNY) has shielded many EMs, particularly in Asia. During the August yen carry-trade unwind, JPY and many G-10 currencies were very volatile. But not CNY, due to Chinese policy that we believe is sustainable. This allowed many EM currencies to rally during this supposed period of instability, with the Malaysian ringgit, for example, up 5% during the episode.

Risks and Opportunities

The biggest risks in emerging markets bonds come from DM. A sharp economic downturn in the U.S. would likely result in higher long-end interest rates, which could reprice interest rates globally. However, there are significant opportunities in EM bonds. In local-currency and hard-currency bonds, risk premia (real rates in local currency and spreads in hard currency) are high, so a rate-cutting cycle could clearly underpin EMs—particularly EM local currency markets, where EM central banks have been keeping rates arguably too high for too long waiting for the Fed. In hard currency, the spread is really in the HY sovereign space, with a number of countries winning from geopolitics (for example, replacing Russia as a commodities supplier to Europe).

Explore more Emerging Markets Bonds Insights.

Emerging Markets Equity: Keep an Eye on Trade Intensity

Ola El-Shawarby, Portfolio Manager, Emerging Markets Equity

Outlook

As the U.S. elections approach, emerging markets face potential impacts from shifts in U.S. trade policies, interest rates and geopolitical stances. Specific issues vary by country but U.S.-China trade relations and technology-related policies, Mexico’s trade agreements and Russia’s geopolitical tensions are all critical factors. Since many of the current trade barriers put in place against China have been orchestrated by the prior Trump administration (with no meaningful improvement during the Biden era), we do not expect a very significant change in U.S.-China relations post elections, despite likely market volatility in the near term. Similarly, since U.S.-Mexico trade agreements have already been revised during the previous Trump era and the Mexico nearshoring story remains structural and strategic for the U.S., we expect stabilization after the current election noise. That said, we are keeping an eye on the ongoing less favorable judicial reform process in Mexico, which may come under criticism by the incoming U.S. administration and potentially impact U.S.-Mexican relations, particularly in the case of a Harris presidency.

Overall, we note a persistent drift towards lower trade intensity compared with economic growth. In part, this is driven by enhanced political appetite for home-biased industrial policies and higher tariffs. We don’t see this changing after the November election; however, we think that the Democratic ticket may produce a more nuanced approach to China in particular. We also note that a more accommodating Fed policy leading to lower U.S. rates and potentially a weaker U.S. dollar bodes well for emerging markets overall.

Indicators to Watch

Investors should closely monitor campaign platforms, Federal Reserve statements, economic data releases, and changes in trade policies for early indications of policy shifts. Key indicators include currency and commodity price movements, particularly the U.S. dollar, investment flows, and market sentiment, alongside legislative and regulatory developments in the U.S. and EM countries.

The pace of the decline in short-end rates in the U.S. will matter for the ability of many EM central banks to cut rates.

Risks and Opportunities

In emerging markets equities, a key risk is a potential delay or reversal in the expected rate easing cycle within the U.S. and emerging markets, which could disrupt market stability. An uptick in the strength of the U.S. dollar is another risk factor that could negatively affect emerging market equities. Political risks are also a concern, with less favorable outcomes in upcoming elections and continued geopolitical tensions potentially creating an uncertain investment climate. Additionally, an escalation in the economic conflict between the U.S. and China could further strain international relations and market sentiment. On the opportunity side, emerging markets could benefit from lower-than-anticipated inflation in the U.S., which might lead to more aggressive interest rate cuts and a subsequent weakening of the dollar, making emerging market equities more attractive. A more decisive policy approach by the Chinese government to address the property issue and stimulate the Chinese domestic market would be a positive indicator, offering a potential boost to global market confidence. Lastly, a calming of geopolitical tensions and favorable outcomes in key upcoming elections could provide a conducive environment for market growth.

Explore more Emerging Markets Equity Insights.

Gold: Will Demand from Western Investors Return?

Ima Casanova, Portfolio Manager, Gold and Precious Metals

Outlook

The path of U.S. monetary policy should continue to have a meaningful impact on gold prices over the near term. Specifically, we believe that the Fed’s plans to reduce interest rates, in reaction to cooling inflation and relatively stable unemployment, signal a stronger outlook for gold. Historically, this has often proven to be the case.

Gold Historically Performs Well Following First Fed Rate Cuts

Source: JPMorgan, VanEck. Data as of July 31, 2024. Past performance is not indicative of future results.

The next U.S. administration’s plans for stimulus measures, foreign policy and environmental regulation are also worth monitoring, as these factors can have significant implications for both the price of gold and the broader mining industry. For now, substantial stimulus measures or an escalation of geopolitical tensions, irrespective of the governing party, are viewed as “gold-positive” factors.

Indicators to Watch

Beyond the factors mentioned above, investors should continue to monitor U.S. inflation trends and leading indicators of recession. A resurgence of inflation or early signs of a recession could unsettle U.S. markets, potentially triggering a shift from equities to safe-haven assets like gold.

For gold miners, we believe it is crucial to track both the price of gold as well as All-In Sustaining Costs (AISC). These two metrics—gold price and AISC—are key determinants of miners' profit margins and serve as a good barometer of their financial health. Currently, with costs remaining relatively contained and gold prices at all-time highs, we see the potential for significant free cash flow generation among miners.

Margins for Miners Healthy Despite Higher Costs

The all-in sustaining cost (AISC) is a metric used by gold mining companies to calculate the cost of their mining operations.

Source: Scotiabank, VanEck. Data as of June 30, 2024.

Risks and Opportunities

The biggest opportunities for gold, in our view, are: 1) the potential return of Western investors to gold, and 2) continued strong purchasing by central banks. Investment demand, traditionally the main driver of gold prices, has been relatively weak during the latest gold rally. We believe that renewed interest from Western investors, driven by heightened risks to the U.S. economy, could propel gold prices to $2,700 to $2,800 per ounce.

Additionally, despite robust purchases of gold in recent years, central banks in emerging markets remain underexposed to gold relative to their total reserves, with indications of further increases. If both investor and central bank demand for gold and gold equities continues to improve, this additional demand could significantly boost gold prices and the valuations of gold stocks.

The biggest risk to gold prices remains the possibility of a “soft landing” for the U.S. economy, where sustained positive growth is achieved alongside consistently lower inflation. In such a scenario, investors may favor “growthier” assets like technology stocks over gold.

Explore more Gold Insights.

Natural Resources: All Eyes on Global Growth

Shawn Reynolds, Portfolio Manager, Global Resources

Outlook

We continue to believe there is a compelling rationale to invest in global resources to protect against event risks. Geopolitics currently remains the most pressing issue from a macroeconomic perspective. The ongoing war between Russia and Ukraine, mounting tensions in the Middle East, and planned tariffs on Chinese imports into the U.S. and Europe are just a few of the adjacent factors having a meaningful impact on commodity prices today. Global elections—and speculation about how incoming administrations will engage on these issues—appear to be intensifying matters.

Indicators to Watch

At the macro level, aside from the issues noted above, we continue to keep a close eye on U.S. inflation and global growth. Historically, inflation has had a way of persisting and resource equities have always exhibited some form of leverage to global growth.

At the industry level, we continue to monitor capital allocation decisions – capital expenditures, dividends, share repurchases and inorganic growth as well as overall balance sheet health. Moderated levels of spending on new resource growth continue to have long-term, structural supply implications while investors’ demands for free cash flow generation and return of capital remain a priority.

Risks and Opportunities

The biggest risk to commodities and resource equities is a muted global growth outlook and/or full-on economic recession. Such an environment could put commodity prices at risk and create considerable operating headwinds for associated producers.

Lower rates have the potential to stimulate economic growth, which is generally price-positive for commodities. In our view, interest rate cuts also present meaningful opportunity for renewable resource companies, which generally tend to benefit by way of more favorable financing terms.

Explore more Natural Resources Insights.

Fixed Income: Stay on the Short-End of Fixed Income

Fran Rodilosso, Head of Fixed Income ETF Portfolio Management

Outlook

The election season is overlapping with a turn in U.S. monetary policy, with the first rate cut of the cycle looming some 15 months after the last hike. In many ways the market has priced in both events—the nuance being that elections have little to do with changes in the business cycle and both major parties will be reluctant to completely remove stimulus that the other has instituted (even in the case of a Republican sweep).

This election’s impact is likely to be much more significant in terms of regulatory conditions and the strength of institutions that will impact the U.S. economy over the course of time than it will be on measurable economic conditions for the ensuing 12-24 months. There are of course a few “soundbite” policy initiatives that could also have a more immediate impact on the market, including the threat of removing Fed independence, major changes in capital gains treatment and blanket tariffs. If and to what degree these soundbites turn into viable policy initiatives will be a 2025 question.

Therefore, we see the election results as having limited immediate impact on rates, domestic credit, or emerging markets credit. Unfortunately, some of the longer-term dynamics in place—a federal deficit that will exceed 7% of GDP for years to come, resource scarcity especially around energy transition, and global conflicts—eventually will catch up with markets. The deficit issue itself will keep us cautious on Treasuries and duration for the foreseeable future.

Indicators to Watch

During the mini growth panic this past summer, credit markets displayed much lower volatility than one would have expected given the moves in equities. With the yield curve inverted and credit spreads tight for most of the last two years, credit has continued to flow freely via the public bond and private credit markets. The stress that has defined the commercial real estate sector has not spilled over to other areas of the capital markets. These indicators (among others) signal that financial conditions have remained somewhat easy despite the more than 500 bps of rate hikes. We believe the first real signs of durable market stress and a potential recession will show through in the debt markets. We will remain on the lookout for liquidity events, downgrade trends and increased dispersion in credit market pricing, all of which would also show up in wider spreads.

Risks and Opportunities

A rate shock would be the event that catches most of the market off balance at this point. We have seen shifts in investor positioning in anticipation of lower rates across the curve, and some of the calm in credit markets is certainly ascribable to the expectation of reasonable refinancing rates for borrowers. Any dollar strength that would accompany unexpectedly higher rates would likely hit EMs hard as well. The most likely causes of a rate shock would be unexpectedly high growth and/or an inflation spike, but mounting debt or Fed independence issues could shake market confidence at some point as well. We believe that maintaining front-end exposure (where yields remain higher) and a quality bias within credit will continue to earn attractive carry and protect against both a rate shock/spread widening event and a growth-led credit scare. Extending duration via a barbell approach is one way to maintain a healthy amount of front-end exposure, and we like the use of investment grade CLOs for this purpose.

As we remain on the lookout for a turn in the credit markets, we believe that fallen angel high yield bonds could emerge as one of the more exciting opportunities, and within high yield allocations, their high BB exposure should provide some downside protection into such a turn. On balance, we see emerging markets debt as one of the few bastions of value and a defense against the rising debt/deficit situation in the U.S., as well as the possible political disruption that could follow election day. Further fiscal stimulus in the U.S. will benefit EM assets as well.

Explore more Income Investing Insights.

Municipal Bonds: Lower Rates Should Help Municipal Borrowers

Tamara Lowin, Senior Credit Analyst, Municipal Bonds

Outlook

On a federal level, investors are most focused on the municipal tax exemption. While the ultimate objective of the tax exemption is to reduce borrowing costs for municipal borrowers, it is often viewed as a tax shelter for the wealthy who, with the highest tax bracket, have the most to gain in tax-exempt income. The constant re-education of staffers and representatives on the Hill is always required, but the current budget challenges and an additional $4 billion expense, if the Tax Cuts and Jobs Act of 2017 is extended, argue for some form of municipal tax exemption remaining in the conversation. Relatedly, changes in federal income tax rates and the AMT exemption are high on our watch list.

We are also watching regulations, elections, constitutional amendments and tax resolutions on state ballots this fall. Utah’s proposed constitutional amendment would likely result in lower school funding, for example. Several states want to reduce property tax burdens, and Washington State is looking to repeal its capital gains tax. All of these could impact the credit strength of municipal bonds. Past funding and regulation have significantly impacted the quality and accessibility of healthcare across states (and thus the healthcare providers). We are looking at ballot initiatives and races that could impact future funding, nursing home bed count, and any regulations like professional to patient requirements.

Indicators to Watch

The mass exodus of local government employees, teachers and healthcare professionals from the workforce remains a significant financial stress on the education and healthcare sectors, as salary and wage expenses increase significantly and are unlikely to decline as long as temporary employees are required. Employment and wage-related trends on both federal and state levels will indicate if and where the pressure will be relieved. Home sales and mortgage applications will likewise indicate consumer confidence and state migration trends.

Risks and Opportunities

Declining interest rates mean municipal borrowers can more easily access the market. Projects that were shelved due to higher borrowing rates are becoming more affordable as interest rates decline. Strained borrowers will once more have the opportunity to refinance existing debt to reduce the pressure of their annual debt payments—a long tradition in the municipal market that has not been available over the past few years. In high yield sectors seeing an increase in stressed borrowers, the reemergence of refinancing means struggling municipal borrowers have a mattress at the bottom of the cliff. As a result, we expect to see an increase in debt issuance in the fourth quarter.

Explore more Municipal Bonds Insights.

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