Global Equity Investor insight | October 2024

Jeremy Richardson

Hello, this is Jeremy Richardson from the RBC global equity team here with another update. Three things to talk about this time. Democracy, debt and deals.

So on the democracy, we've got US elections coming up in November. The polls are very close. They're essentially four potential outcomes. One party gets control of the white House and Congress or the other party gets, both of those, or there's a combination between the two. So essentially four outcomes. And the polling is so close that it's really hard to differentiate between which is the most likely.

Talking to political experts, they tell me that there's a margin of error of around about 3 to 4% in the polls. And until we get one of the candidates leading by more than that, it seems as though it's still too close to call. But for equity investors, that's not necessarily a bad thing, because if you get one of those outcomes where one party has the white House and the other party has Congress, then it makes legislation really, really tricky, and so you're less likely to get significant change. And for equity investors. Less change actually helps us forecast the future when thinking about company profits. So it's not necessarily something to be feared of from an equity market point of view.

The other thing I thought was quite interesting was some research that crossed my desk this last week or so, talking about the likely path of equity markets into the election, because whilst we have a very divided election and that means that one side of the political discussion worried the other side is going to win. And the other side is worried that the other side is going to win. That means that, you know, very few people are sort of got the confidence to come in and buy, but after the election, we get clarity, we get certainty, there is a result, and at least half of the market is probably going to be happy with the outcome and they at least will buy.

So the trajectory after the election could very well be sort of, a more positive, trajectory. However, there are some things that we don't quite fully know the answers to yet and which as an investor, I will be looking for more clarity over as we get closer to Election Day, and that is around, two particular aspects which I think will potentially impact corporate profitability.

The first one, taxes, and the second one, tariffs. Now, you know, both parties have different, manifestos on both of these two items. There is a sense that, taxes are more likely to rise under Democrats and that tariffs are more likely to rise under the Republicans. So, you know, you can't have your cake and eat it, it seems one on both of these two things. If one party wins you're going to get something which is less helpful. So again it may be a middle path where you have that division that may offer, some sort of solace, but more clarity around that I think would be appreciated by equity investors.

For the moment at least. We're not seeing either of those two things being factored yet into market expectations for individual company, profit forecasts. That's an area of potential risk ahead. So, moving on from democracy, let's talk a little bit about, debt and the reason for mentioning this is because, when we come to the US election, there's a there are a lot of promises that are being made.

It's always the way with elections. You win on the basis of promises, but those promises will ultimately have to be paid for. And the size of the US budget deficit is something that I think at the moment at least in capital markets, is not receiving a huge amount of attention and yet when we look at the path for future interest rates, it seems as though there is quite a, dare I say, bullish point of view, from the market expecting a series of interest rate cuts to get down to lower than 3%, as the terminal rate.

Now, if we think that inflation is going to be sort of is beaten and, you know, we expect some sort of positive real rate of interest to balance the needs of savers and borrowers. That seems quite an aggressive assumption, for the moment at least whilst it holds, though, you know, lower interest rates actually are quite supportive for capital markets generally.

And the final thing I just wanted to mention was deals. A bit like London busses, nothing happens and all of a sudden three come along at once and there are three really interesting deals which I think are worth keeping an eye on. The first of which is the offer for, US Steel by Nippon Steel of Japan.

The second is the, bid by Alimentation Couche-Tard for Seven & I, the Japanese convenience store operator. And the third is, UniCredit. That hasn't actually formally announced a deal yet, but is expected to to do so for Commerzbank. All three of these are interesting for different reasons. Essentially they are though, pointing to, they're asking questions of governments.

Do governments, the Japanese government, the US government, the German government, believe in free open markets and free capital? Or will there be pressure to actually intervene in these deals, for more domestic local reasons? And that's a really interesting question, because it does, I think, show, call into sharp relief some of the, pressures that governments are feeling, to respond to electorates around having a more active industrial policy.

But when we think about, you know, initiatives like, you know, trying to raise productivity in the EU, the recent Draghi report on that topic, or in Japan, the Japanese government trying to, you know, stimulate higher returns on capital. That would suggest a more open point of view, but those sort of more open decisions don't come without any political cost.

So it will be interesting to see how those deals progress. And whether they are allowed to progress. I hope that's been of interest. And I look forward to catching up with you again soon.