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With the news of President Joe Biden stepping away from the presidential race, all bets are now off when it comes to the outcome later this year. The importance of the US election cannot be overstated. No matter where you live in the world, the outcome makes a difference.

In this episode, Mohammed Nalla took the lead with his views on the Democrat vs. Republican policy approaches and what they could mean for developed and emerging markets. If you ever wondered whether you need to pay attention to US politics, this show will put that thought to bed once and for all.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

Full transcript:

The Finance Ghost: Welcome to episode 185 of Magic Markets. Moe, it’s always good to do this with you, even in a week where personally I haven’t had the best one from a health perspective. But anyway, we persevere. The show must go on. I don’t think we’ve missed a single week of Magic Markets since we started, other than the typical planned break for two weeks in December, so I guess that’s pretty good going. I think this week was close, to be honest. But here we are, and we’re doing it, and I’m looking forward to at least making you do most of the hard work this week by talking about your favourite subject in the world: geopolitics.

Mohammed Nalla: Indeed, Ghost. It’s been such an interesting week, and not because you’ve had health issues. I know I was joking with you on the sidelines saying, is The Finance Ghost actually Joe Biden? Because I hadn’t seen you for a couple of days in person, you sounded terrible on the last audio call we did, and you’re known to like ice-cream. I thought maybe we’ve unveiled The Finance Ghost and it’s Joe Biden all along, but I think that’ll be taking away from what you bring to the Magic Markets table. I’m glad you’re back on the desk today, and thanks for doing this show. Indeed, in terms of the topic, geopolitics, certainly interesting. But this week we’re going to focus specifically on what’s been happening in the US. We obviously had the attempted assassination of Donald Trump around two weeks ago, and then this weekend, it looks like US politicians are taking a leaf out of South African politicians’ books because everything seems to happen on the weekend when markets are closed. Maybe that’s a good thing. This weekend, we actually had Joe Biden announcing that he was dropping out of the race in the next election. And this caused a bit of a stir because there’ve been rumblings about it, sure, but I think it caught the market a little bit by surprise, and not just the market, but certainly the Democratic Party as well, because for the next few hours after that announcement – and it was on Sunday afternoon, our time – for the next few hours after that, there’s really lots of question marks around well, who is the successor going to be?

Interestingly enough, his vice president, Kamala Harris, she was very quick out of the starting blocks. Really almost started campaigning immediately saying, “I’m going to be Joe Biden’s successor.” Remember, the process here is that they’ve got to have their democratic convention. At the convention, candidates are usually put forward, and then they kind of vote and decide who’s actually going to be in the running. But what seems to have happened over the last couple of days, and at the time of this recording – we’re recording this on Wednesday, the show goes live on Thursday – at the time of recording, it appears as though a couple of things have happened. One, Kamala Harris has secured sufficient support in the Democratic Party, sufficient seats in order to be the official successor to Joe Biden and effectively the frontrunner in their pitch for the next election. That’s important. The other important thing, and I want to go into some of the detail here, is if you look at polls, we know that Joe Biden was polling really badly against Donald Trump, certainly after that disastrous debate that he had had with Trump. Biden, lots of concerns around his cognitive ability, his overall health. He’s just an elderly man. Ironically, just a few years separating him and Donald Trump, but vastly different in terms of their physical performance and appearance. And following that, and now, obviously, with Kamala Harris being the candidate, it appears as though certain polls are showing Harris in the lead over Trump. Now, I say that very, very tentatively, because I’m referring to an IPSOS poll that happened very recently, which shows that Harris now has a two percentage point lead over Donald Trump. Bear in mind, that’s wafer thin, and the poll itself has a three percentage point margin of error. It’s pretty much neck-and-neck at this stage. But I think that’s already an improvement if you base it on where Joe Biden was polling against Donald Trump. And we can unpack what some of the modalities are, what some of the potential impacts are that we’ve seen come through in the market now, as well as what the road forward looks like.

The Finance Ghost: Look, it’s tough from down here, I guess, to know for sure. But it did seem to me like a Trump-versus-Biden election was only going to go one way, and now it’s not so obvious anymore at all. That’s going to be pretty interesting to see how this all plays out. Moe, you’re a lot closer to that side of the world, although you’re in Canada. It’s not your president either, certainly won’t be mine. But the reality and the reason we’re talking about this is whoever’s running America has got a very large impact on the global economy. It is relevant no matter where you are sitting, and that’s because of the different policies that they bring to the table, right, and I guess we should probably start moving into some of that because that is ultimately why this is important for markets and how people will think about the markets for the rest of this year and indeed for a few years thereafter, depending on how those policies are implemented.

Mohammed Nalla: Indeed Ghost. You’re a bit more geographically remote, yes. The US president is not my president, but will be my neighbourhood, I just sit north of the border here. And what happens in the US has a very direct bearing, not just on the world, but very direct bearing on Canada specifically. Let’s touch on some of those points. Obviously, when it looked as though Trump was in the lead versus Joe Biden, there was, let’s call it the Trump Trade that started to come through in the market. Now we try and contextualize what the Trump Trade is.

The Trump Trade effectively is one that favours lower rates. Remember, Trump, during his first term as president, was actually quite critical of Jerome Powell, the Fed chair. In fact, he had said he would want to fire Jerome Powell, obviously backtracked on that a little bit, effectively saying that if he becomes president, he let Powell finish off his term. But Trump has been very vocal around his preference for lower interest rates.

It certainly makes sense, given where the US economy is right now, that we’re probably going to see a rate cutting cycle materialize. In fact, as we’re recording this, the bank of Canada just cut rates for a second time in the cycle. They were one of the first G7 economies to actually cut rates. We’re probably going to see that interest rate cycle materialize one way or another.

But remember, one of the other parts of the Trump Trade that is maybe a little bit more complex is Trump’s stance on China. We know that in his first presidency, he was very critical of the US-China relations. And ironically, despite all of that criticism, despite all of the rhetoric around tariffs on China, and effectively, what is a very fractured relationship between these two global powerhouses, the reality is that the Biden administration has probably delivered more restrictive policy on China than the initial Trump administration. And what I mean when I say that, when you look at 100% tariffs and Chinese EVs, for example, that’s something that came through in the Biden presidency, the Biden administration. It’s not quite clear cut.

And what I want to reference here is we had hosted a geopolitical strategist on the show, his name is Marko Papic, and he’s really fantastic. He’s at BCA research right now. And he posted something on Twitter just the last couple of days ago noting the obvious headlines that, oh, Trump’s going to be negative for US-Chinese relations and so forth. But he highlighted that certain comments that Trump had made during several speeches indicate that it’s more complex than that. And I’m going to reference these directly. These are excerpts, effectively. But Trump has been known to say that, and this was a quote, large factories are being built across the border in Mexico. They’re being built in China to make cars and to sell them to our country. We don’t mind that happening, but those plants are going to be built in the United States, and our people are going to man those plants. Now, that’s an interesting take, because it indicates that maybe he doesn’t have that much of a problem with China effectively participating in the US economy and economic growth, but he wants to see that investment come back to the United States. If we were to hypothesize, he would arguably be comfortable with Chinese corporations investing in the US, set up these larger manufacturing plants, as long as it employs Americans, he could potentially be okay with that. And that is really different to the Democratic Party’s take on it thus far. And I think that is something that’s quite interesting.

Then if we just zoom out and we look at another point of contention, the Middle East. Trump has been known to say that Iran was broke while he was president. They had no money. Then the following administration came in, they did a deal with Iran. Iran now has a lot of money. But he also indicated that the Trump administration was ready to make a deal with Iran. He said Iran was going to make a deal with us, right, so this indicates that Trump is a deal maker. We know this. And potentially, what does this mean? It means that those relationships that the market might just be saying, these are fractured relationships, they’re going to break, they’re going to escalate under a Trump presidency. It’s maybe not as clear cut as that. Trump is known to be very transactional. We know that he has a very different take on the Russia-Ukraine war, for example. His administration, arguably, I would say, a bit closer to the Russians than the Biden administration. The question mark I raise is, would a Donald Trump presidency arguably usher in an era of maybe a little bit more geopolitical stability? I know it sounds insane when you throw it out there, but could it actually? During his term, you actually saw the US withdraw from several arenas globally in terms of their military presence. And then we had the Biden administration that withdrew from Afghanistan, but that was done in a disastrous manner. All of these aspects really present a much more nuanced picture to what a Trump presidency might mean. And on top of that, remember, now that we’ve got Harris in the race, it does become neck-and-neck. It makes the market’s perceptions a lot less certain than they maybe were about two or three weeks ago.

The Finance Ghost: Moe, from a South African perspective, Chinese strength is important, right? Well, actually, far more than just a South African perspective. We’ve seen it in the luxury industry. I saw LVMH’s share price taking a bit of a knock based on weakness in China. And Richemont released some pretty crummy results, also based on weakness in China. People think, oh, the rich will always have money to buy this stuff. Yes, to a large extent, they will. But when the broader economic picture is not so great in a country, they almost get a little bit embarrassed. And that actually ends up impacting the sales of these very outward shows of luxury-type goods anyway. Even though the people can afford it, they don’t see it as being appropriate to actually have that stuff. That’s just one example of many of how Chinese strength impacts a sector. And that would obviously impact something like Richemont on the JSE. But it’s much bigger than that, right, because a big part of what’s happened in China has been the slowdown. And that’s impacted stuff like iron ore and steel, commodities in general, actually. China is a huge consumer of commodities, and South Africa is a strong producer of commodities. That feels like an important thing for us to keep an eye on as South Africans, as emerging markets in general, is what will any change in US politics mean for Chinese strength as a whole?

Mohammed Nalla: Yeah, I’m actually glad you’ve touched on two things because I want to go into the China story, and then you’ve also touched on sectoral performance. And I’ll maybe end off on the sectoral performance because I want to outline what a potential Trump Trade looks like for the various sectors in the US. Let’s start off with China, because if you look at the recent slate of Chinese economic data that was put out around a week ago, it was weak almost across the board. Their GDP slowed down in the quarter. It’s still positive, but Chinese growth has been slowing. We know that there are deep structural concerns within the Chinese economy, specifically around the real estate market. And we actually saw house prices falling in China. Now, if you have a look at trade performance, maybe the last two months, you saw a little bit of an uptick in trade performance, but that’s off a very low base. And then very importantly, if you look at domestic Chinese performance, you’ve seen this massive pressure on the Chinese consumer. You’ve actually seen, for example, if you track a metric like new loan growth in China, that has continued to slow and are now at record low levels.

Interestingly enough, just yesterday, the Chinese cut a key policy rate to try and provide monetary stimulus into that economy. And again, this was after an era of providing a lot of accommodation, then pausing for a while, they’ve now resumed additional monetary stimulus, effectively in that economy to try and shore up economic growth. They’re also having, or just recently had, the Chinese Communist Party plenum, where they effectively outline their long-term plan. Remember, China tends to plan in decades. I think the Chinese story is an interesting one. Yes, there are structural concerns there, but I think for as long as you’ve got someone like Xi Jinping – love him or hate him – as long as you’ve got him at the helm, he’s got a very strong strategic sense on where he wants China to go. And like I say, you can love that or you can hate that. But arguably, he is very focused on structural reform and getting the underlying health of the Chinese economy on a stable footing.

Now, if we actually bring that into a debate around the US and China again, remember, these are two global hegemons that are vying for supremacy. And yes, the US is still the world’s superpower, but we can’t ignore the fact that China, on a purchasing power parity basis, has an economy that rivals the United States. You want to see a strong China again from an emerging markets perspective. China really plugged into those commodity producers. And if you see China start to bottom out, start to build some strong foundational building blocks for the next phase of the economic growth, that’s what you want to look at for an emerging markets growth story. Obviously, this is intrinsically linked to the US. If the US consumer is strong, they tend to import Chinese goods. Some of that might go back into the United States. And again, the question mark comes about which sectors will do well. Now, you’ve correctly pointed out, if you look at luxury goods, you’ve seen pressure come through on global luxury goods emanating from China. And that is because they were overly reliant on Chinese growth, the Chinese consumer, for a lot of that growth impetus that had come through. Remember, markets in the developed markets, certainly they’re well-developed, you’ve got your share of market, it’s not growing as dynamically, as quickly as certain emerging markets are. It stands to reason that any wobbles in the Chinese economy will disproportionately affect those sectors.

Now, let’s go across to the United States, because I want to touch on the Trump Trade. And first and foremost, what’s happened since the weekend’s announcement to where we are now. Well, the dollar initially got stronger. We’re now slightly weaker than where we were at the latter part of last week. You also had bond yields moving higher. Why would bond yields move higher? Well, again, you’re going to have to digest the economic data around that, but there is any potential uncertainty that comes through on the political front may actually pressure bond yields, and specifically in the US, this comes about with regards to concern around the size of fiscal deficits. The Biden administration has been keeping the fiscal pump primed. They’ve really been providing a lot of that impetus in the economy. And that, from a fiscal metrics perspective, raises some serious question marks around the sustainability of US debt.

The Finance Ghost: Okay, Moe, so leading into how the markets can actually be played to take a view on this stuff now, obviously, guessing which way the election will go, not so easy. We’ll watch the polls, we’ll see what happens. There’s this talk now in the headlines of a Trump Trade. I haven’t seen anyone come up with something cute yet around a Harris trade. Of course, a Trump Trade would mean change. It would mean the Republicans coming in. I guess that’s why it gets a lot of the focus, as opposed to the Democrats continuing where they’ve left off in some respects. What does that Trump Trade look like – if there’s going to be a change in politics in the US, what sectors look interesting, and any views on if it’s going to be more of the same? Do you kind of just stick to where we’ve been? Is that kind of where we’re headed? Interested to get your views on that.

Mohammed Nalla: Yeah, Ghost, I think that’s really the trillion dollar question, right? Is that, yes, okay, there’s nothing cute for the Harris trade, because Harris, at this stage, is still early days, is really seen as a continuation of the Biden administration. She hasn’t really differed that much from the president on a lot of the key policies and their policy stances. Trump, however, is diametrically opposed to a lot of that. I’m going to outline just at a high level – and again, this is simplistic, it is simplifying what is a very complex scenario. Bear in mind, the perspectives I provided earlier show that it can be a little bit more nuanced. But first and foremost, if you have a look at Trump’s stance on, let’s look at a sector like financials, that’s the banks and so forth, Trump has really been pro-deregulation in that space. And if you get more deregulation coming through in terms of banks, that could theoretically be very positive for the financial sector as a whole. Trump has been known to be arguably friendlier towards Wall street. I would see that as a potential sectoral perspective on a Trump Trade vis-a-vis financials.

Then if we look at something like energy, we’ve covered a lot of energy stocks in the US, we’ve looked at something like NextEra. And remember, the interplay here is what happens with clean energy versus what happens with fossil fuels. And again, Trump has really been very pro-deregulation in the energy sector. He has been very pro-fossil fuel production. You might actually see if you’re someone who proposes that climate change is a bad thing- and again, we can get into another show on that – but climate change activists are not going to be happy with a Trump presidency simply because he is seen to be pro-fossil fuels. You might see the climate or the green energy theme take a little bit of a step back, and you might see a lot more emphasis come through in terms of conventional fossil fuel producers. That will have a bearing on energy companies vis-à-vis their mix of energy in their portfolios. Then if we look at something like, for example, industrials, there’s been an emphasis, and I would say here’s where you probably get a lot more congruency, the emphasis on the need for infrastructure spend in the United States. The Biden administration has hammered on this really quite hard, as has the Trump administration. Trump has indicated a willingness to bring jobs back into the United States. I would see that as a theme that’s maybe consistent: infrastructure spend, pro-business policies, defense.

That’s something that we discussed at length last week. But again, you could argue increased defense spending. I think defense in the US is really one of those consistent themes where defense spending is really quite high. Maybe the mix changes. I would have a slightly more nuanced view on this, Ghost. I think my view on this is that if you looked at the first Trump administration and now a potential second Trump administration, during his first term in office, Trump wasn’t out there sending US troops into all parts of the world. You might see a change in mix of spend, the emphasis maybe being on less procurement from the US Department of Defense, and maybe outsourcing that demand to US allies. Trump has been known to actually hammer hard on NATO and some of the allies, saying, you’ve got to do your bit, and again that transactional nature might shift that emphasis off spend away from the US spending on defense towards allies spending on defense.

And then lastly, let’s maybe look at something like healthcare. This is something that’s very topical, right, is that Trump has really tried to hammer quite hard at Obamacare, or what is the Affordable Care Act, colloquially known as Obamacare, and any potential to repeal or dial back on that could have a material bearing on the healthcare sector. And it’s quite mixed, because if you looked at something like pharmacy benefit managers, this would mean maybe more flexibility in terms of the kind of prices that they can actually charge for some of the drugs that they’re sending out there. But it might, in aggregate be bad for insurers, because if a lot of people are not covered by Obamacare, they might then have to actually submit more insurance claims. Whilst insurers might get more customers, they might also have to pay out a lot more on the claim side of things. I would see it as maybe simplistically, in a nutshell, good for PBMs, bad for insurers, maybe even bad for medical devices. If Obamacare was paying for a whole bunch of medical devices, maybe if you’re self-insured, your insurance company might not do that.

And then lastly, big tech. Why I say lastly is that Trump has been known – he was on X, very popular, then left X, then started his own social media company. And I would say it’s possibly a question mark, but a negative for big tech here, because he has been vocal around antitrust issues. He has been vocal about the strength of some of those tech behemoths like Google. Just keep an eye out on that. It might also be negative given the China relationship we mentioned. It might also be negative for the large semiconductor chip manufacturers because there’s a big reliance on China, not just from a demand perspective, but also the tensions around Taiwan and so forth. Any question marks around the Chinese relationship and the success of bringing some of those jobs to the United States will probably impact big tech. It will probably impact automotives and then other consumer goods like companies like Nike. We’ve covered them again on Magic Markets Premium, and Nike is heavily reliant on China and associated economies for its manufacturing. You could see some of that impact come through and hurt firms in that space. I think that’s trying to wrap a lot of this into a nutshell. But again, just cognizant of time, these are high level thoughts, and it’s likely to remain quite fluid as the situation develops. We’re going to be watching those polls very closely Ghost.

The Finance Ghost: And golf, Moe, golf is a strong Trump Trade. Based on everything I’ve seen on my Twitter for the last couple of days while I’ve spent a surprising amount of time flat on my back, with Bryson DeChambeau putting out a YouTube video with Trump as well. We covered Acushnet a few weeks ago. I quite enjoy my golf, so maybe that’ll give a bit of a boost to the game.

Mohammed Nalla: Talking your book, Ghost.

The Finance Ghost: The US geopolitical situation is going to be all over the headlines for months to come. Let’s see, let’s see how it all plays out. As South Africans, certainly, well, for me, still living here and economically exposed here as much as I am, I’m just hoping for an outcome that is useful for emerging markets. Beyond that, I don’t care too much, truthfully, but I have a very specific hope that we’ll just see a good time for South Africa between the GNU on one side and maybe, US political stability and some good policies that help out. I’ll tell you, the other thing I’m looking forward to is whether or not Elon Musk’s love of Trump continues if those EV subsidies go away, that’s going to be very interesting because those two things are at odds with each other. Musk loves Trump, but Trump does not love EVs. And that doesn’t really make sense to me.

Mohammed Nalla: Yeah, interestingly, Musk has actually said that the EV subsidy should go away, right, I think now that he’s built out his production and so forth, he doesn’t want those subsidies to give his competitors any potential edge, but he’s very happy to collect those government subsidies in other businesses he’s involved in, like SpaceX. Again, question marks there. We had Elon being very complimentary towards Trump. Then I saw a headline saying, oh, well, actually, that funding he said he was going to give to the Trump campaign, he’s actually looking at pulling back. I don’t know, it remains very fluid.

Maybe a last and a parting comment on this as we wrap up, Ghost, is that as we speak, Minister Parks Tao from South Africa is actually up in the United States. He’s in Washington. He’s having a lot of discussions with policymakers. And remember, what’s important for South Africa with the US at the moment is AGOA. We’ve got to actually see that AGOA is renewed, that South Africa continues to enjoy preferential access to US markets. And again, we know that Trump has not been so complimentary towards some of those. I think it would make sense for the South African delegation to try and button that up, certainly before the election. Whether they move right now in terms of the current administration, whether they get something signed before the year is out, is questionable. But from a government of national unity perspective, South Africa is doing well to try and just walk that tightrope between keeping the US happy or the western bloc happy, and at the same time keeping the eastern bloc, let’s call it China and Russia, happy on the other side, that’s what South Africa has to do very strategically.

Unfortunately, Ghost, that’s where we’ve got to leave it this week to our listeners. Let us know what you think of the subject matter. We have been including a lot more macro discussion and it looks as though our listeners are enjoying it just based on the listens and the numbers that we’re seeing over there. But hit us up on social media, it’s @magicmarketspod, @financeghost and @mohammednalla, all on X. Or go and find us on LinkedIn and pop us a note on there. We hope you’ve enjoyed this. Until next week, same time, same place. Thanks and cheers.

The Finance Ghost: Ciao.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.