U.S. Elections 2016
Barings’ investment professionals provide insights on how the U.S. presidential election may impact the fixed income, equities, alternatives and real estate markets.
As a result of the breadth and depth of our direct private equity or—“Directs”—portfolio, we don't expect any one political event, such as Brexit or the U.S. Election, to impact our portfolio in the near term. That said, we devote a substantial amount of time to assessing how a very dynamic geopolitical landscape can impact our portfolio companies. For example, our investment team recently spent time reviewing our sector level investment theses and considering a handful of opportunities and risks that could follow from a changing political doctrine in Washington D.C.
First, we agree with the consensus view that both parties support some type of domestic fiscal action through greater infrastructure spending. We do not have a strong view on how any targeted fiscal stimulus will be implemented. However, we are optimistic that such a program may finally lead to the beginning of a Public Private Partnership (PPP) market in the U.S. Importantly for BAI, we believe the development of a PPP market would slow the drift of infrastructure capital beyond its mandate and into our value-add sectors.
Second, it is becoming increasingly clear that the Affordable Care Act (ACA) needs improvement; the term "intensive care" comes to mind. Our base case is that the program will be restructured rather than repealed. Given our team’s 10+ years of focus on the pharma market, we are scrutinizing how various proposals to amend the ACA could impact our portfolio and current investment plans. Prior to the implementation of the ACA we began diversifying our portfolio into the generics segment of the pharma market, a decision that has proven fruitful. But given the strong demographic factors and growing global middle class that is supporting healthcare demand, we believe there will be excellent opportunities in the global pharma market for years to come, regardless of policy changes going forward.
Global trade has been one of the most contentious issues of this election cycle. The BAI Directs portfolio is largely a U.S. domestic portfolio and almost entirely a USD portfolio. Nonetheless, we believe the global benefits of free and fair trade are tremendous. Impact to trading relationships can have far-reaching impacts on an economy, affecting everything from agricultural goods to intellectual property (IP). The latter is of particular interest to BAI given our long-standing presence as a direct IP investor. As of today we do not see any significant threat to our portfolio holdings, but we will be continuously assessing the potential for pending trade deals, which could support IP rights holders, to regain traction.
It should not be lost on investors that one of the greatest risks to institutional portfolios is through interest rates, directly and indirectly. The extremes of both major U.S. political parties, given the opportunity, would likely challenge the independence of the Fed. Political intervention in monetary policy has the potential to rapidly re-price markets and currencies and change capital flows. For many investors, the greatest impact may be through equity factor risk, but the root risk would be changing interest rates or expectations thereof. We view politicization of the Fed as a small risk, but something that shouldn’t be ruled out in the face of a Trump administration.
Lastly, the U.S. election is just one of many significant data points coming up before 2017. The Fed, ECB, BOE and BOJ will all meet at least once before year-end. In late November the U.K. “Autumn Statement” is published and OPEC meets. Italy has a referendum in early December and on the same day there is an Austrian presidential re-run. And on December 15, there is the last EU Council meeting of the year during which the EU could provide some guidance on the U.K. Brexit process. Beyond the normal end-of-year planning that takes place in our investment committee, the market will give us lots of information to digest and react to over the next 45 days. We’re all going to need some time off by the Holidays!
The BAI Direct investment team partners with long-term institutional clients to deliver durable income and capital appreciation through economic, business and political cycles. The top-down aspect of our investment process is focused on identifying and diversifying into themes that we believe create an attractive opportunity set through time. Similarly, the bottom-up component of our investment process is driven by asset selection, targeting asset types within economic sectors that we believe will offer attractive risk-adjusted returns through the life of an investment.
Jonathan Rotolo, CFAManaging Director, Barings Alternative Investments
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