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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Election boards around the United States have been busy counting
ballots, and it looks like betting markets got it right
Trump rode the red wave to victory, with the GOP taking
control of the Senate, and potentially the House as well
The knee-jerk reaction to the outcome was swift and substantial
Despite the near-term volatility, TCW is intent on looking through the noise
Economic outcomes take time, and policy can take even longer
And at the end of the day, markets are driven by data
Welcome to TCW Investment Perspectives Podcast, where we have gathered leaders
from our fixed income, equities, and emerging markets team to discuss the
election results and how those results will affect the markets going forward
I'm David Vick, and joining me today is our CIO of fixed income,
Brian Whalen, our CIO of equities, Michael Reilly, and the
founder and co-head of our emerging markets group, Penny Foley
Thank you all for joining me on what is a very busy day
Obviously, market reaction has been dramatic
But how much of this is sustainable, and what
are the longer-term outcomes likely to be?
The fact is that matter will be different for different sectors
So, Michael, let's start with you on the equity front
What's happening now, and what's this mean for your markets looking forward?
Sure
Thanks, David
Well, obviously, stocks are rallying quite sharply
The market's not just pricing in Trump victory, but rather a
Republican sweep, even though the House outcome hasn't been called
That's important for the equity market because of the
implication of potential tax cuts, not just the extension of
the Trump tax cuts, but perhaps further corporate tax cuts
And of course, that's good for earnings
I think, in general, what else is equity market-friendly
would be things like reduced regulatory burden, particularly
in the financial sector and the energy sector as well
This is likely to spur M&A with less interference
with perhaps the exception of big tech
There's still questions there
And then I would also say that domestic-oriented
manufacturing is likely to be favoured
But there are also losers today as well
And I'd point out clean energy is getting severely hurt
Companies with operations abroad or strong overseas
revenue bases hurt by the prospect of tariffs
Brian, how about the fixed income markets?
Actually, I'll build off what the tone that Michael was setting
I think it said it well, whether you're looking at the equity markets, the rest
of the fixed income markets or any market side, which is like right now, I think
the question and where our belief is that the election results, and let's just
assume it's the red wave, it's going to be more at least in the near term
about the micro level, like the bottoms up, meaning I think what would
be tangible is to Michael's point, there'll be winners and losers
There'll be sectors that win, there'll be sectors that lose, there'll be
companies that win, there'll be companies that lose, there'll be parts of
the consumer segment that win, and there potentially could be some that lose
So the bigger question for us and the bigger moves in
the market are more about the macro level, the top down
And the question is, does this shift in the political landscape, can it
overcome and overwhelm and change the economic or the business cycle?
Like, that's the big question we have to answer
And the market moves based upon that we're seeing today, it really feels
more like not only is the market pricing in that the Republicans are going
to get everything they want to the extreme nature that they want, but
they're also going to get it done in a very short order of magnitude
And if you look back over history, many, many presidents, recent ones in
particular, have come into office with a lot of hope and a lot of change and a
lot of momentum only to within the first 12 months of being in office to find
out that they can't effectively outrun the business cycle or a
change in the credit markets and they have to deal with a bump
And that when we look at the markets today and we're looking at credit spreads,
risk compensation in the corporate bond market, we look at yields rising,
it doesn't seem like risk is appropriately priced for anything other
than this big economic boom based upon regulatory changes or tax cuts
Great
Thanks, Brian
Penny, how about what's happening in EM?
EM is a very large asset class, 70 countries plus, and it's
characterized by both external debt and local currency debt
So there are a lot of different losers and a lot of different winners
I think the initial reaction in local EM markets was to price in
renewed US exceptionalism as Brian suggested, better relative
growth, slower pace of Fed easing, no questions asked
And that's resulted in a stronger dollar, particularly
against low yielders in Asia and in Europe
Mexico, which is a perceived big loser from the Trump
trade, was off close to about three and a half percent
overnight, but it's retraced almost entirely this morning
Brazil and Turkey are actually rallied on the news
So again, very different reactions
I think that said, increased uncertainty and volatility
is always a problem in the near term for EMFX
It's always going to be a headwind
And so in that environment, you know, we continue to like
high yielding idiosyncratic local markets where we've been
involved really pretty much this year, like Egypt and Turkey
Also, relative value trades with longs in countries with attractive
fundamentals and likely to be less impacted by Trump trade policies
That's India, Indonesia and even South Africa against
shorts in places like China, Thailand and Mexico
You know, in the hard currency EM markets, high yield sovereigns
are outperforming today, effectively flat on the day in total
return terms, which reflect better growth prospects in the US
benefit them and also lower duration versus the benchmark
Countries that are perceived to benefit from Trump policies, such as
Ukraine, Argentina and El Salva are actually up one to two points on the day
You know, EM investment grade sovereigns are down,
really, you know, reflecting the sell off in US
treasuries with spreads tightening by about 10 bips
Corporates are outperforming sovereigns
They're stronger credit fundamentals and shorter duration
We are long, 12 percent long, high yield sovereigns which are benefiting today
And we are also benefiting from a 20 percent off index allocation to corporate
So again, it's it's over, you know, a number of different
impacts depending on country, depending on how open economy
Great
Thanks, Penny
So maybe a question for for the group
Does the election results, does it change sort of the
fundamental outlooks to change where we see value in markets?
Or is this just sort of a temporary blip that will kind
of that won't change the trajectory of the economy?
Maybe I'll start there
I'll start with interest rates and then Penny and Michael can build off that
I would say
As we've been in this higher interest rate environment now, as the Fed
raised rates throughout, you know, 2022 in particular, the last time
Well, the first time the credit markets wobbled because of
interest rates, it was in the fall of twenty three and the US
10 year was basically around 5 percent
And the credit markets interpreted that as something
at a rate that the economy couldn't handle
And you saw start to see some volatility and rates came back down
And then we saw rates go back up again in the spring of this year
And they peaked out in April around four point seven five percent 10 year
You're seeing a trend here
And the credit markets started to wobble again and they came back down again
Now we're in this new environment where the Fed is starting to cut
They're most likely going to cut at their next meeting
And we're almost at four point five percent on the 10 year
And credit markets and equity markets are doing anything but wobble
And I think that's an interesting kind of point to make
And a question investors have to ask themselves, I guess, things materially
change where like there's all of a sudden this economy, is it something
that can handle between four and a half and five percent interest rates?
We would contend that's not the case
And that should kind of factor into your decision making
Yeah
And I would add to that, you know, it is an open question
How healthy is the labor market?
We've seen the lower end consumer really struggle
Companies are telling us that
And so, of course, this election doesn't change that in the near term
So we have to see what the health really is of the job market
And also this whole notion of tariffs and the incidence of tariffs
and how much is bluster and how much actually gets, you know,
applied does matter to individual stocks and to the equity market
And we have to see how much is inflationary, how much isn't,
what does it do to growth and the growth profile for the economy
So there's some some big open questions out there, to be sure
And Penny, from the EM side, what are some
of the longer term things you're looking at?
What are some of the factors, you know, outside the election
that you think are going to be important in context of the
election, but moving forward from here in emerging markets?
Yeah, I think the potential tariff war obviously has impact on certain
countries beneficially and a significantly negative impact on others
So, you know, certain EM countries will stand to benefit
if China starts to move imports away from the US
So, for example, in 2016, Trump 10, agricultural
imports into China were moved from the US
to Brazil
So benefiting EM, that can happen
There are also certain countries that will benefit from a diversification
of supply chains away from China, although I think it's likely that the
Trump administration are going to be super vigilant about backdoor trade
So don't get that excited about that
In terms of China's stimulus, you know, I think obviously fears of increased US
tariffs will be a persistent headwind for the CNY
But the magnitude, I think in the short term, and you can
see that today, will be tempered by the PBOC intervention
The outlook for weaker US-China trade relations could also impact the
extent of the China stimulus package we expect to see in the next
couple of days, which could offset these impacts to some extent
I think longer term, one needs to watch the US
dynamics
Obviously, US
equities are rallying on better growth prospects today, but it's unclear
if this move will be sustained given the potential impact of deportations
and secondary effects of tariffs on prices and consumer demand
I think those are clearly concerns for 2025
that have to be, you know, have to be monitored
You know, let's maybe pull the conversation back to the US
here, but on a point that Penny was making with regard to tariffs, and I'll kind
of link that to my comments on interest rates, I think right now, you know, the
market's kind of running with the idea that not only higher debt issuance, which
should push up interest rates, but also higher kind of inflation,
at least in the medium term, a lot of it linked to the tariff
And what we think about is, first of all, the first time Trump 10,
you know, the tariffs implemented then, first of all, it took a
long time to implement and they did not lead to higher inflation
Actually, we saw lower inflation
And this is an individual who negotiates very aggressively and he starts
at the extreme and then he settles anywhere he can, which usually
somewhere in the middle or something, quote unquote, reasonable
So when we think about the tariffs, we're, you know,
we're not dismissing, but definitely a grain of salt
We're taking the idea of 60% tariffs on
China and 10 to 15% on the rest of the world
And we say, you know what, like it's going to be something lower than that
And let's remember, we're a service oriented economy
These tariffs are on goods and they're not on all the goods
They're on some of the goods
And also, regardless of how much gets pushed
through, someone has to pay for that, obviously
But in an economy, if it is weak and the job market continues to weaken,
it probably won't be the consumer paying those taxes through higher prices
It's probably going to be companies absorbing
that through our currently pretty healthy margins
And that actually pulls down on growth and
potentially could actually pull down on inflation
So we're definitely not in the camp that whatever tariffs get
put in place beyond what's currently in place are going to
automatically lead to higher inflation and higher interest rates
All right
Thanks very much, everyone, for your insights
We appreciate your time today
Thanks, everybody, for joining us on TCW's Investment Perspectives podcast
For more information on TCW strategies, please visit our website at tcwcom
Thanks for listening
We'll pick up next time exploring the trends
and opportunities shaping global markets
Thanks, everyone, for joining us on TCW's Investment Perspectives podcast
We'll pick up next time exploring the trends
and opportunities shaping global markets
Thanks, everyone, for joining us on TCW's Investment Perspectives podcast
We'll pick up next time exploring the trends
and opportunities shaping global markets
Thanks, everyone, for joining us on TCW's Investment Perspectives podcast
We'll pick up next time exploring the trends