Harris vs. Trump: does it really matter who's going to win?

What happened

As the outcome of the upcoming U.S. presidential election remains uncertain, investors are closely examining what each candidate's policies could mean for the economy. While their proposed agendas may differ, and provide varying flavors of short-term boosts, neither is expected to significantly alter the core forces currently shaping the U.S. economy. This consistency in fundamental economic drivers, despite looming political uncertainty, provides a framework for understanding the likely future market trends.

Impact on our Investment Case

Both Candidates Will Be Facing Complex Challenges

Despite their different plans, both candidates, if and when elected, must tackle important issues that will force their hands on foreign affairs and the economy. The United States is at a crucial point, dealing with a growing trade deficit that requires careful coordination between economic policies and international relations. Traditional ways of managing this deficit are becoming less effective as global trade patterns change. Additionally, the slowdown of globalization and increasing tensions between countries are making supply chain management more complicated. In light of these overarching issues, the political programs of the candidates will have only a minor impact over the medium term. Any volatility surrounding the elections is likely to be only short-term noise. 

The Current Account Imperative

Worldwide, there's a noticeable split among major economies based on their current account balances. The United States, along with the U.K. and France, has significant ongoing deficits, meaning (in very simplistic terms) they buy more from other countries than they sell. In contrast, countries like China, Germany, and several nations rich in resources have substantial surpluses—they sell more abroad than they purchase.

Typically, when a country runs a current account deficit, it leads to an excess of its own currency in the global market. This surplus usually causes the currency's value to drop, making imports more expensive and exports cheaper, which helps reduce the deficit over time. However, this usual adjustment doesn't apply to the U.S. dollar because it holds a unique position as the world's primary reserve currency. This special status keeps the dollar's value relatively stable despite the large deficits.

America's Unique Economic Position

The United States has held a special place in the world economy since the Bretton Woods agreement after World War II, a position later strengthened by the petrodollar system. This status was originally based on America's technological and manufacturing leadership. The idea was that strong global demand for high-quality American products would balance out the import of cheaper goods.

The petrodollar system, established in the 1970s, made the U.S. dollar the main currency for international trade, especially in oil transactions. This created a cycle where increased global trade led to higher demand for dollars. This demand kept the dollar strong and allowed interest rates in the U.S. to decline.

Challenges to the U.S. Dollar's Dominance

The stability of the current economic system relies heavily on foreign investors choosing to reinvest their dollar earnings back into U.S. assets, mainly by purchasing U.S. Treasury bonds. Historically, there's been a clear link between the total U.S. trade deficit and the amount of U.S. debt held by foreign investors. Even with the sharp acceleration of U.S. current account deficits at the end of the 1990s, foreigners kept buying U.S. debt. 

However, this relationship has recently started to weaken, and the gap between U.S. current account deficits and foreign held debt has widened significantly. As countries focus more on bringing manufacturing back home (onshoring) and as global political tensions rise, there's a gradual move away from using the U.S. dollar in international trade, a process called de-dollarization. These changes are putting increasing pressure on the factors that have kept the dollar dominant. Rising long-term U.S. interest rates suggest that there are fewer willing buyers of U.S. debt, so higher returns are needed to attract investors and maintain demand for the dollar.

_{This chart presents both the cumulative US current account deficits and the total US debt held by foreigners. The chart shows critical inflection points around 1998 and again in the mid-2010s with a further acceleration during the Covid era. Source: US Treasury, Atonra}

America's Two-Pronged Strategy

In this challenging situation, the United States is taking a two-fold approach.

• Foreign Policy Efforts

First, the U.S. is focusing its foreign policy on addressing challenges from countries that have large current account surpluses. These countries include China, Germany, and to a lesser extent, Russia. The main goal is to ensure that these nations do not threaten the dominance of the U.S. dollar in global markets.

• Monetary Policy Measures

Second, the U.S. is using its monetary policy to make sure that financing its large national debt remains orderly and that interest rates stay at acceptable levels. This is especially important now because foreign investors have significantly reduced how much U.S. debt they hold (at least in relative terms, and some major countries, namely China, also in absolute terms). As a result, the U.S. needs to find ways to fund its debt without relying as much on foreign investment, while keeping the economy stable.

Foreign Policy Strategies

The United States has developed a sophisticated approach to address its economic challenges. It continues to leverage its technological advantages, especially in areas like artificial intelligence and medical technology. But it also focused on developing an industry with captive buyers that can help boost its exports, namely the military-industrial complex. The increase in global conflicts has boosted demand for American military equipment, which helps reduce the U.S. trade deficit as well as stimulating the domestic economy.

• The rise in hot conflicts

By supporting Ukraine or Israel, the U.S. military sector benefits from continuous demand for defense equipment. Encouraging European nations to increase their defense spending, such as higher contributions to NATO and direct aid to conflicting parties, have the convenient side effect of reducing Germany's trade surplus and increase demand for U.S. weapons exports. Within this framework, some analysts suggest that the U.S. may have an interest in the continuation of the conflicts in Ukraine and elsewhere across the globe. 

• Sanctions on Russia

Sanctions imposed on Russia aim to reduce its trade surplus and compel increased spending on domestic needs, including defense. Additionally, reduced economic ties between Russia and Germany limit Germany's access to affordable energy, which has been crucial for its industrial competitiveness. This may lead to a further decline in Germany's trade surplus, but also indirectly impact its main trading partners, like China and Russia.

• The middle-eastern cauldron

The ongoing crisis in the Middle East is viewed by some as part of a broader strategy. Maintaining strong relationships with Saudi Arabia and other Gulf oil producers is crucial for the United States because these countries support the petrodollar system. As nations like China, Russia, and Iran seek to strengthen ties with these oil-producing countries and promote alternatives to the petrodollar (such as trading oil in Chinese yuan, sometimes called the "petroyuan"), the U.S. feels the need to respond strategically. Increased instability in the Middle East may serve to reinforce U.S. influence and counter the growing presence of rival nations.

• The Chinese challenge

The primary long-term challenge for the United States is its economic relationship with China. While the U.S. aims to close the economic gap, China sees an opportunity to expand its global influence and leverage the financial situation of the U.S. to achieve its goals. Although China faces its own financial issues, its significant trade surplus provides flexibility to invest in future projects, such as the Belt and Road Initiative, which aims to enhance trade and stimulate economic growth across Asia and beyond.

Monetary Policy Strategies

The Federal Reserve and the U.S. Treasury are working together more closely than ever to manage the shift away from heavy reliance on foreign investors buying U.S. debt. Their main goals are to keep financial markets stable and maintain acceptable interest rates. As foreign investors have reduced their share of U.S. debt, domestic financial institutions and the Federal Reserve itself (to be found under the "Other inv." label in the table here below) have stepped in to fill the gap.

_{The table shows the differential between the relative share of US debt held in 2013 and in 2023 by the different classes of investors. As can be seen, the sharp drop in "Foreign" was split between "Financial Institutions" and "Other Inv.", the latter including (among others) the Fed's QE program. Source: US Treasury, Atonra}

To adapt to these changes, the Treasury has adjusted how it issues debt. Between 2019 and early 2024, it significantly increased the proportion of short-term securities from 29% to 37% of the total debt. Short-term securities are generally easier to sell. This strategy helps manage borrowing costs because short-term interest rates are typically lower. However, relying too much on short-term debt can be risky, and this approach is now reaching its practical limits.

To maintain stability in financial markets during this shift in debt management, the Federal Reserve has introduced over the past few years a number of innovative measures. One such approach has been the use of large-scale Reverse Repurchase Agreements (Reverse Repos) during the Covid-19 crisis. These operations encourage financial institutions to hold U.S. Treasury bills by offering them a way to earn interest on excess cash, which supports demand for these short-term government securities.

However, the current financial environment presents challenges. As shown in the chart below, we are in a "negative carry" situation, where short-term interest rates are higher than long-term rates. This means financial institutions are disincentivized from holding longer-term U.S. debt compared to shorter-term bills, making it harder for the government to finance its obligations.

_{This chart presents both the US 10 year treasury yield and the FED funds rate. When the latter is below the former, in what is the normally shaped yield curve, financial institutions can get financing at the short term rate and invest in long term securities, earning a positive carry. In a negative carry situation, as is the current one, there is little incentive to hold long term securities. Source: FRED, Atonra}

To address these challenges, it's essential for the yield curve to steepen. The yield curve shows the difference between short-term and long-term interest rates. A steeper yield curve means long-term rates are higher than short-term rates, which is considered a healthy sign for the economy and encourages investment in long-term projects.

However, significantly increasing long-term interest rates isn't ideal because it would raise the government's borrowing costs. Interest payments are already at record levels as a percentage of the budget deficit, so higher long-term rates would add more financial strain.

Therefore, the Federal Reserve is motivated to reduce short-term interest rates instead. By lowering short-term rates, the Fed can steepen the yield curve without causing long-term rates to rise sharply. This approach helps make holding longer-term securities more attractive to investors and supports the government's financing needs without excessively increasing interest expenses.

The Inflation Challenge

Significant changes in the global economy are causing persistent inflation. One major factor is the move away from globalization. Countries are adopting protectionist policies to shield their own industries, which reverses the decades of cost savings we enjoyed from global supply chains connecting the world. The shifts may not be immediate, and more than re-shoring or on-shoring we are currently seeing rather friend-shoring, but the process has started and is likely to continue for some time. 

Demographic shifts are also playing a role. As populations age, there are fewer workers producing goods compared to the number of consumers. The aging population also leads to increased spending on healthcare and pensions. Additionally, fewer available workers mean the labor market is tightening. This shift gives more bargaining power to employees, which can drive wages and prices up (and attract immigration, which plays the role of the adjustment variable).

The silver lining here is that it would not be another supply-side inflation scare like during the Covid-19 crisis, but rather a demand induced inflation. It may seem a trivial difference, but it has important investment implications: demand induced inflation is usually more gradual and acts as a growth booster for sound companies with pricing power. 

On the other hand, rapid advancements in technology, especially in artificial intelligence and computing, might help counteract some of these inflationary pressures. These innovations could increase efficiency and reduce costs, potentially lowering prices. AI stands at the forefront of technological progress and could be the key factor in balancing out other trends that are pushing prices higher.

What About Equities?

The current economic pressures resulting from trade deficits and government policies create a supportive environment for owning real assets like stocks and property. As governments use monetary and fiscal policies to manage growing deficits, inflation becomes a natural outcome. Importantly, this inflation is occurring alongside economic growth driven by technological advancements, companies bringing manufacturing back to their home countries and increased government spending. We already made the case for domestically exposed SMID-caps versus the international mega-caps going forward. 

In this environment, stocks, especially those of companies with strong market positions and the ability to set prices, are likely to benefit from ongoing inflation and economic growth. Historical evidence shows that stocks can effectively protect against inflation when companies are growing their revenues and maintaining profit margins. Similarly, commodities (like oil and metals) and real estate, which are traditional hedges against inflation, should continue to offer protection.

Digital assets, including cryptocurrencies, might also benefit from the inflationary environment and the gradual shift away from traditional government-backed currencies. The combination of continuous government spending, supportive monetary policies, and increasing questions about the dominance of the U.S. dollar is creating natural demand for alternative stores of value and means of exchange.

Risks

The current economic environment comes with several uncertainties. One major risk isn't just inflation but the possibility of stagflation, a scenario where prices keep rising while economic growth slows down or stops. If the economy doesn't grow as prices increase, it could lead to this challenging situation.

However, there are reasons to be optimistic. Increased government spending, technological innovation, and companies bringing manufacturing back home (industrial reshoring) suggest that economic growth is likely to continue. If growth persists, inflation could benefit stocks, making it a net positive for equities.

A more immediate concern is electoral uncertainty. If election results are contested or there's a prolonged period without clear political leadership, it could disrupt the markets. History shows that during such times, market volatility tends to spike, potentially affecting stock prices regardless of how well companies are performing.

Our Takeaway

Our thematic approach allows us to capture these structural trends while maintaining flexibility across market conditions. Each theme addresses specific aspects of the evolving global landscape:

AI & Robotics

This strategy sits at the intersection of several critical structural trends. As populations age and labor markets tighten, AI and robotics technologies offer powerful solutions to wage inflation pressures while boosting productivity. This becomes increasingly important as the benefits of globalization fade and companies seek new ways to maintain competitive advantages. We've strategically increased our emphasis on software solutions over hardware components, reflecting both lower supply chain vulnerability and more attractive valuations. This shift aligns with the next phase of the AI revolution, which focuses increasingly on applications leveraging LLMs rather than infrastructure. The sector serves as a natural hedge against inflationary pressures by reducing labor costs and improving operational efficiency across industries. Moreover, its position at the forefront of great power competition underscores its strategic importance in the global technological race, implying the significant and steady flow of investments are bound to continue. 

Bionics / Biotech 360°

These complementary strategies directly address the challenges posed by aging populations and increasing healthcare needs. Bionics focuses on enhancing healthcare delivery efficiency through automation and technological innovation, while Biotech targets the fundamental causes of diseases. These themes are particularly resilient, as healthcare remains a non-cyclical sector, and its long-term demographic tailwinds ensure persistent demand. The U.S., ~50% of the world healthcare market, is always trying to reform its healthcare system. It is trying to balance minimizing dependency on foreign medical products by strengthening domestic biotech/bionics innovations and manufacturing, with regulating drug pricing and medical procedure reimbursement to not drown in bills. High barriers to technological entry and slowness of reforms is what provide these sectors stability even amid political shifts, making them favorable for growth over extended periods.

Fintech / Mobile Payments / Blockchain and Digital Assets

In the face of evolving monetary policies and yield curve adjustments, digital assets and fintech solutions emerge as key diversification tools. Our fintech investments capitalize on delivering innovative solutions that enhance efficiency, accessibility, and personalization in financial services. The payment industry keeps shifting away from cash transactions while increasing the integration of payment systems with specialized software platforms and value-added services. The sector has matured significantly, with companies now focusing on profitability rather than mere revenue growth. The payment industry has reset to more attractive valuations while maintaining strong earnings growth projections. The expected continuation of fiscal spending and geopolitical tensions further reinforces the attractiveness of decentralized digital assets, both as inflation hedges and as instruments that operate independently of traditional currency markets. As institutional adoption grows through approved securitized vehicles and regulatory frameworks become clearer, digital assets are increasingly positioned as potential hedges against currency devaluation.

Security & Space / Cybersecurity

As we continue to observe an increase in regional conflicts and a digitalization of warfare, our investments in companies within these sectors stand to benefit from sustained demand. Current geopolitical dynamics, underscore the heightened demand for security technologies, cybersecurity solutions, and space infrastructure, creating a robust foundation for long-term growth: military is the forefront where new technologies are developed and tested, before spilling over into civil use. Space is the new frontier of combat-related intelligence and logistics, while cyberattacks are now integral part of modern warfare. The increased importance of cybersecurity due to digital transformation across industries aligns with current government policies, which also sees rising cybersecurity investments as a way to protect critical infrastructure. Our strategies offer exposure to physical and cyber security, as well as the space sector, thus covering all bases and ensuring we capture the multiple growth opportunities offered by the digitalization of security across the globe and beyond. 

Sustainable Future

Contrary to misconceptions, the clean energy transition is advancing swiftly. Recent IEA data shows strong H1-2024 momentum, with solar PV installations up 36%, electric vehicle sales rising 25%, and wind power capacity holding at record levels. Clean energy equipment costs are at their lowest, down 17% in Q2-2024 YoY, and paired with lower interest rates, these conditions set the stage for robust renewable energy growth. Growing electricity demand is a key driver, fueled not only by data centers, but also electric vehicles, heat pumps, and air conditioning, all of which require significant investment in new generation capacity and grid infrastructure, sectors where our portfolio has substantial exposure. In the U.S., we prioritize companies benefiting from bipartisan policy support for domestic manufacturing and job creation, providing resilience across political cycles. In China, we focus on market leaders with strong pricing power (notably in the battery and power inverter segments), tapping into the country’s leading role as both a producer and consumer of clean technology. This approach aligns our portfolio for strong growth at attractive valuations, supported by robust earnings prospects that outpace broader market benchmarks. 

Here below a table synthesizing the key financial indicators for our strategies.

Regional Perspectives

United States: We prefer U.S. companies that focus on domestic markets, particularly smaller companies that might benefit from trends like bringing manufacturing back home (onshoring).

China: Our focus is on domestic consumption and companies benefiting from the Belt and Road Initiative, while closely monitoring the impacts of healthcare reforms.

Europe: We're highly selective, concentrating on specific companies with strong drivers rather than broad regional themes.

Risk Monitoring

Keeping a close eye on risks is crucial. The interplay between government spending, geopolitical tensions, and technological competition creates a complex risk environment. This requires constant vigilance and active management to navigate effectively.

Conclusion

To succeed in this environment, we need to understand the intricate relationships between fiscal policies, global political tensions, and technological competition, all while staying flexible to adapt to rapid changes. With persistent inflation alongside continued economic growth, we believe that real assets and equities are likely to perform well over the next few years, even though there may be periods of increased market volatility.