Shulou(Shulou.com)06/03 Report--

Abstract: with the slowdown of global economic growth and the presidential elections in Britain and the United States, investors are facing the test of various problems.

Source | UBS

Original title:

"UBS Year Ahead 2020"

Translation: long Bridge LongBridge

Global economic growth is likely to slow to its lowest level since the financial crisis in 2019 as economic growth slows in the United States, Europe and China.

Although the labour market and consumer momentum remain relatively healthy, trade between the United States and China has led to a slowdown in economic growth, affecting market confidence.

Data sources: Haver, CEIC, national statistics, UBS

There are three key questions.

1. Differences between leaders

Both the United States and Britain face elections. But there is polarization among the candidates. differences include how to build a health care system for a growing aging population, rising income inequality, the global role of nation-states, advances in science and technology, and who is responsible for environmental damage.

How to decide each problem will affect future global trends and distinguish between the winners of "betting" and the losers of "betting" wrong.

two。 International trade

China has launched a challenge to the United States in the fields of economy, technology and geopolitics, and this challenge will only continue. In today's era of "de-globalization", even if the trade situation between the two countries reaches a brief reconciliation, the turbulence in the trade situation has not dissipated and may even break out again in 2020.

But for both sides, they want to contain tensions. Agreements to reduce or abolish existing tariffs and commitments to stop tariff increases could significantly reduce instability in the global economy and release pent-up investment demand.

This is especially true for US President Donald Trump, which allows him to "declare victory" in the coming election year.

Data sources: Caldara, Dario, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo "The Economic Effects of Trade Policy Uncertainty," International Finance Discussion Paper, Federal Reserve Board of Governors, as of 10 October 2019

3. monetary policy

As the benchmark interest rate has been close to, equal to or below zero, the effectiveness of traditional monetary policy is decreasing, so we need to consider the role of monetary policy in stimulating economic growth in the future.

Given the divisions in the US Congress, the tightening of the eurozone budget and China's control of leverage, a major fiscal stimulus in 2020 seems unlikely. But the current fiscal and monetary policies of low inflation and low interest rates can provide substantial upward space for our growth expectations. Even at the cost of doing so, a "mini-crisis" may be needed to force policy makers to reassess their current practices.

Investment in 2020

In the end, all these issues will be determined by political orientation, so it is difficult to assess their value in financial markets, which makes many investors reluctant to take risks, but by choosing less risky investments. in order to regain control of the degree of risk in its portfolio.

We believe that in order to better prepare for the future. Building a sound portfolio in next year's "election year" requires the following investment decisions:

In the stock market, we recommend selecting stocks with good dividend yields in a low-yielding world. We also recommend that while making diversified investments around the world, we should choose more domestic and consumer-centric companies that may provide more reliable returns than those that bear trade risks and higher business expenses.

-in terms of fixed income, in view of the low yields on the safest bonds and the rising credit risk of some high-yield bond issuers, we recommend a more moderate approach. We prefer emerging market sovereign bonds, European bonds with the name "crossover" and quality preferred issuers among Asian high-yield bonds. Investors can also seek sustainable alternatives to traditional bonds.

-in other ways, we recommend choosing precious metals over cyclical commodities, using a combination of safe-haven and high-yielding currencies to outperform the dollar, and reducing leverage.

"what does the US election mean for my portfolio?"

Investors should not expect or expect specific results in the presidential election. On the contrary, we believe that diversity is the key.

The United States is one of our preferred markets, but as the election approaches, the US stock market is likely to face higher volatility. Stock prices may fluctuate particularly in specific areas, such as technology, energy, finance and health care, due to the risk of regulatory scrutiny.

Source: PredictIt

On November 3, 2020, American voters will elect their president. As usual, all seats in the House of Representatives are in contention, and although Democrats need only four seats to regain control of the Senate, 23 of the 35 seats in the race are incumbent Republicans.

What is the key question for investors?

National presidential elections tend not to have a significant impact on global investors, but the U. S. presidential election is an exception.

The US accounts for about 55 per cent of the MSCI global index. Us Treasury yields are the benchmark for global financial asset valuation, while the dollar participates in 88 per cent of global currency transactions. Therefore, both domestic and foreign investors need to pay attention to many key issues.

Tax policy

Under the Trump administration, US corporate tax fell from 35 per cent to 21 per cent, helping the S & P 500 rise nearly 10 per cent. If Trump is re-elected in 2020, we expect the current corporate tax rate to remain the same.

Source: Internal Revenue Services, UBS, as of 22 October 2019

But the Democratic candidate has put forward various proposals to increase corporate tax. Former president Joe Biden also discussed the possibility of a 28% interest rate, which we estimate would lower the S & P 500 by 3-4%.

Discussions on the subject may add to pre-election unrest, but tax increases must be approved by Congress, so such tax increases are possible only if Democrats win a majority in the White House and Congress.

Trade policy

In the past year, the trade conflict between China and the United States has been the main cause of market turmoil.

Despite signs of reconciliation between China and the United States in the fourth quarter of 2019, investors will worry that if President Trump is re-elected, he will no longer have to face a future election, which could lead to a return to aggression towards China. And he has warned that the deal negotiated in his second term will be worse.

At the same time, his political rivals have shown that a conciliatory approach to Sino-US trade is unlikely if the Democratic Party is elected the next president.

Technical laws and regulations

The five largest listed companies in the world are US technology companies (Saudi Aramco became the most valuable listed company in the world after listing), which together make up 16 per cent of the market capitalization of the S & P 500 index and 8 per cent of the MSCI global index. Over the past five years, they have accounted for 15% of the overall performance of the u.s. market.

Source: Bloomberg, UBS

Despite the significant contributions made by technology companies over the past few years, we believe it is time for investors to carefully evaluate large technology stocks.

President Trump has previously hinted that tech giants may be subject to scrutiny by antitrust regulators. Warren, a Democrat, also published a plan for "how do we break down the tech giants?"

All of these will exacerbate the turmoil among US technology giants, but we do not think it is possible to reduce their market share through legislation in the short term.

The idea that Internet companies are monopolists is very difficult to prove. Antitrust cases still take a long time to establish and file. Of course, investors worried about increasingly stringent regulation can consider shifting their focus from large technology companies to other companies that have long benefited from the digital transformation.

Environmental laws and regulations

The Trump administration has relaxed environmental regulations, a trend that is likely to continue in the second term, and any Democratic president will almost certainly readjust them.

If Congress is divided, larger policy changes such as the Green New deal are unlikely to be passed. But the carbon-based energy sector is likely to come under pressure from measures to curb carbon emissions, and if President Warren vows to ban gas fracking, the exploration and production subindustries could be affected.

By contrast, we want companies related to clean energy, clean air, carbon reduction and energy efficiency to do better under the leadership of the Democratic administration. so they can provide potential "hedges" against more aggressive external environmental risks.

Reassign

If President Trump is re-elected, he will try to make the personal tax cuts issued in 2017 permanent. But in our view, income tax rates for wealthy Americans are likely to rise during the Democratic administration, as the federal minimum wage and social security payments rise. Of course, it would be impossible to pass a proposal like a wealth tax without a Democratic majority in Congress.

Health reform

Under President Trump, the Affordable Care Act (ACA) has been weakened. The Democrats still prefer ACA. Biden aims to retain most of it and add public insurance options run by the new government on that basis.

Warren still advocates universal health insurance (Medicare for All), which would cost the US government about $32-33 trillion over 10 years, even though such a bill is unlikely to be passed because Democrats in the Senate do not have a majority.

As a result, if the Democratic Party wins the presidential election, it may move towards providing more public health care, which is a restriction on the pricing power of drug companies, although this approach has gained bipartisan support. but such restrictions could hurt the health care industry and the pharmaceutical industry.

Disclaimer: please note that due to market fluctuations, some prices may have changed and do not apply to the above situation. Past performance cannot judge future results. This article is not an investment advice, your transaction is risky.

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