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Global voters are expressing frustration about many issues but notably the rising cost of living. Yet we see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands. In November, U.S. President Joe Biden will face former President Donald Trump. Under both, pandemic borrowing swelled fiscal deficits – the shortfall in government revenue versus spending. No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits. See the chart. These deficits reinforce persistent inflation and our view that the Federal Reserve will need to keep rates high for longer. We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term U.S. bonds.
We track potential changes on U.S. trade, immigration and energy policy – and see a potential inflation boost no matter who wins. On trade, Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods. Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls. Major changes to legal immigration during a second Trump or Biden administration would have implications for inflation as the U.S. faces a shrinking working-age population. On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.
Elections around the globe
It’s already been a busy election year. In India, Prime Minister Narendra Modi secured a third term to lead the government but will need coalition support after failing to win a majority last week. That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalizing economy. Mexico’s election saw the ruling coalition score a resounding win that points to continuity. We see both India and Mexico benefiting from a rewiring of global supply chains. Though in Mexico, a new president and government rolling out broad reforms could weaken institutional checks and balances. Even as right-wing and populist parties performed well in the European Union elections, centrist parties are expected to keep overall control of the European Parliament. Yet the performance of governing parties will have repercussions, such as President Emmanuel Macron calling a snap election in France after his party suffered a big loss.
The UK votes in early July rather than in late 2024 as originally expected. A decisive victory for one party could create the political breathing space to address the UK’s structural issues, such as weak productivity growth. Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds.
Our bottom line
We stay overweight U.S. stocks for now and eye the key policy areas of the presidential election. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.
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