Are Markets Starting to Pay Attention to U.S. Election Outcomes?

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Presidential nominations are all but secured for Donald Trump and Joe Biden to re-contest for the U.S. presidency. As such, investors will begin to extrapolate the results to financial markets, says a report from iCapital.

The firm specializing in alternative assets says it is early for markets to reflect a possible outcome, but certain equity baskets are already showing election-related divergences. Perhaps most important is recent data indicating that the economy may be operating at a “sweet spot,” which should further support U.S. equities regardless of the outcome of the election, summarize analysts Anastasia Amoroso, Peter Repetto and Nicholas Weave.

President Biden and former President Trump dominated their respective Super Tuesday races on March 5, securing enough delegates to win their parties’ presidential nomination and setting up the first rematch since the 1956 election. This result had largely been expected by the markets, particularly as PredictIt odds on the morning of Super Tuesday indicated a 92% likelihood of Trump securing the Republican nomination and a 77% likelihood of President Joe Biden retaining the Democratic nomination.

Indeed, the market’s subdued reaction to this development also underscored the widely expected nature of this outcome. As the November election approaches, PredictIt odds now show former President Trump with a slight edge, with a 47% chance of winning to President Biden’s 45%.

While it may still be premature for markets to worry about the presidential election, scheduled for November 5, iCapital notes that U.S. equities are beginning to price in the potential election results.

The report released in early March focused on three main points: 1) taking stock of which sectors are showing or are likely to show election-related divergence, 2) noting how volatility spikes associated with elections tend to be short-lived and occur much closer to the election, and 3) focusing on how fundamentals and renewed “economic enthusiasm” should support overall equity returns regardless of the election outcome.

Certain Sectors May Be Starting to Price in Potential Election Outcomes

With eight months to go before the U.S. presidential election, it is early for markets to reflect the likely outcome. However, looking at the performance of certain policy baskets, it appears that markets are beginning to price in a Republican victory.

In fact, since the end of September 2023, the Morgan Stanley Republican basket is up 22.4%, which has not only outperformed the Morgan Stanley Democratic basket, which is down 30%, but has also outperformed the S&P 500’s 18.4% rise. The outperformance of the Republican basket has coincided with a 10 percentage point (ppt) increase in the former President’s PredictIt electoral odds, while President Biden’s odds have only increased 3 ppt.

In addition, iCapital also believes that the Republican basket has benefited from Trump’s lead in virtually every swing state. In fact, if we look at Real Clear Politics’ top battleground states, the former President has an average lead of 4% in these key states. The only battleground state where Trump does not currently have a lead is Pennsylvania, where President Biden holds only a 0.8% lead.

Similar to the outperformance of the Morgan Stanley Republican basket, the Goldman Sachs Republican basket has also outperformed the S&P 500 since September 2023. Indeed, the Goldman Sachs Republican basket is up 21.4% which compares to the 20.3% gain for the S&P 500. Even on a YTD basis, the Goldman Sachs Republican basket has performed in-line with the S&P 500. The outperformance of the Goldman Sachs Republican basket has been more pronounced when you compare it to their Republican underperform basket. Indeed, since September 2023 the underperform basket has lagged by seven ppt. This underperformance has continued into 2024 as it has lagged by five ppt on a YTD basis. Similar to the composition of the Morgan Stanley basket, the Goldman Sachs Republican basket has a cyclical bias and should benefit from financial deregulation, onshoring, construction, energy, coal and steel production, in addition to companies that have their sales coming from small businesses.

iCapital says these baskets will be important to watch as they will eventually provide more insights into what outcome financial markets will price in. For example, in looking back at the 2016 election the Goldman Sachs Republican basket was up 14% from Jan. 1, 2016 through the November 2016 election. This outperformed the S&P 500 by 6.6 ppt.9 Conversely, heading into the 2020 election the Republican basket underperformed the S&P 500 by roughly 11 ppt, indicating that markets were pricing in a Biden victory.

Looking abroad, the analysts that certain international financial markets could be impacted by how polling data and election odds evolve throughout the year, specifically China. Even though Chinese equities have recouped their YTD losses, benefitting from policy easing announcements, Chinese equities were particularly sensitive to trade rhetoric when former President Trump was in office. Indeed, when former President Trump first started mentioning the potential for tariffs, Chinese equities were almost 9% lower, significantly lagging the 18.5% gain for the S&P 500 from January 2018 through December 2019. Given former President Trump continues to tout the potential for further tariffs, we think Chinese equities could become increasingly more sensitive to such announcements.

Spikes In Volatility Will Likely Take Place Closer to The Election

Another reason iCapital believes it is too early for markets to focus on the election is that, historically, the S&P 500 begins to factor in election results in the period between August and October, which is one to three months earlier. In fact, according to the firm’s research, markets tend to experience more volatility in the months leading up to an election. This view is also corroborated by the current time structure of the CBOE Volatility Index (VIX), where the October contract trades much higher than other contracts, indicating that markets are beginning to assign some risk to the election.

Markets Broadly Are Benefitting from the “Economic Enthusiasm”

Even with the increase of the former President’s election odds and polling data, the Republican baskets have also been benefitting from the “economic enthusiasm” given the pro-cyclical composition of the basket in financials, industrial, materials and energy, the firm added.

Focusing on Fundamentals Should Help Investors Weather Any Election Related Volatility

The strength of the U.S. economy has not only supported U.S. equity markets since the start of the year, but has also supported the cyclical trade. While the Republican policy baskets have benefitted from a jump in Trump’s presidential election odds and polling numbers, we also think the pro-cyclical nature of these baskets have benefitted from the “economic enthusiasm” we have seen so far this year.

Of course, investors should prepare for some election volatility which may stem from rhetoric around taxes, tariffs, big tech regulation and export controls, but we would continue to invest through it.

“We continue to believe that focusing on fundamentals and how economic data evolves will ultimately be more important than the election outcome. And regardless of outcome, markets have historically rallied in the 12 months following the election”, concluded the report.

To read the full report you must access the following link.

AXA IM Arrives at the X Funds Society Investment Summit with its US High Yield Strategies

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High Yield offerings will be the focus of AXA IM’s presentation during the X Funds Society Investment Summit in Palm Beach

During the event, to be held April 11-12 at the PGA National Resort, Carolyn Park, US Credit Analyst, will discuss the virtues of the US Short Duration High Yield and US Dynamic High Yield strategies.

US Short Duration High Yield

The AXA IM US Short Duration High Yield strategy aims to achieve high attractive income and capital growth by investing in US high yield bonds which are expected to mature or be redeemed within three years. The strategy is actively managed without reference to any benchmark in order to capture opportunities in US high yield debt market.

US Dynamic High Yield

The AXA WF US Dynamic High Yield strategy seeks to optimize total returns in US high yield by investing in our highest conviction ideas, seeking additional alpha through credit selection and additional coupon income provided by an overlay of credit default swaps. It is actively managed while referencing the ICE BofA US High Yield Index.

About Carolyn Park, US High Yield Credit Analyst

Park is a US HY Credit Research Analyst at AXA IM, with a focus on the homebuilders, building products, gaming, leisure, and lodging sectors. 

Prior to joining AXA IM in 2014, she was a Senior High Yield Research Analyst at Bank of America Merrill Lynch where she covered the services, telecom and technology sectors.  

Park holds a B.A. from the University of California, Los Angeles and a M.B.A. from NYU Stern School of Business.

North America Holds 57% of the Global AUMs of Alternatives

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Private Equity assets based in North America amounted to 7.7 trillion dollars in June 2023, 57% of the global AUMs, according to a report by Preqin.

Although the region’s market share has decreased in relative terms, from 63% a decade ago, private markets have grown overall now holding a slightly smaller share of a much larger market.

In fact, North America accounts for 62% of alternatives if we include hedge funds ($3.5tn of the world’s $4.5tn AUM), according to analysis by Charles McGrathAVPResearch Insights, in Alternatives in North America 2024.

The scale and economic fortitude of the US gives it massive gravitational pull. EY forecasts 2.2% GDP growth in 2024 (although unfortunately Canada’s will be sluggish, predicts RBC). The highly productive and innovative nature of the US is exemplified by Nvidia’s place as the leader in an upward race by global equity markets.

As McGrath points out in his report, the scale of North America’s biggest pension programs means ‘their AUM can rival some countries’ gross domestic product’.

Top of the list?

Canada’s CPP Investment Board ($577.3bn AUM), CalPERS ($489.4bn), Caisse de dépôt et placement du Québec ($371.3bn), CalSTRS ($325.9bn), and the New York State Common Retirement Fund ($259.9bn).

There are also endowments and foundations, such as the University of Texas Investment Management Company ($68.7bn) and the Bill and Melinda Gates Foundation ($67.3bn).

The region’s fund managers have brand power. Six of them attracted more than $20bn each last year. Preqin table of fundraising by 20 North America-based managers over the past decade shows some impressive totals. It’s led by Blackstone ($333.6bn), Brookfield ($184.5bn), KKR ($184.2bn), Carlyle ($136.5bn), and Apollo ($135.0bn).

Insigneo Relocates New York City Office to Park Avenue Address

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Insigneo has announced the relocation of its New York City office to the esteemed 410 Park Avenue, Suite 420, in the heart of Manhattan’s Plaza district.

This move reflects Insigneo’s commitment to growth and its dedication to providing a cutting-edge work environment for its valued team, the press release said.

The new office at 410 Park Avenue boasts state-of-the-art amenities and a modern workspace design, fostering collaboration and boosting productivity among team members, the firm added.

Alfredo J. Maldonado, Managing Director and Market Head for New York and the Northeast at Insigneo, shared his enthusiasm for the move.

“The relocation of our New York City office to 410 Park Avenue is a significant milestone for our firm, symbolizing our expansion and heightened capabilities. Our new office space embodies our commitment to fostering a dynamic and collaborative work environment, strategically positioning us in Manhattan’s financial hub,” said Maldonado.

Insigneo looks forward to leveraging its new location to better serve clients, strengthen its presence in the New York City market, and continue its journey of innovation and growth. This strategic move not only enhances Insigneo’s work environment but also solidifies its position as a key player in the global wealth management industry, concludes the press release.

Citi Hires Richard Weintraub to Lead U.S. Family Offices Unit

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Citigroup added Richard Weintraub to lead its wealth management group dedicated to family offices in the U.S.

The new leader of the section comes from UBS and will join on the next May 7th, according to an internal statement signed by Ida Liu, Global Head of Private Banking at Citi.

Weintraub will report to Hannes Hofmann, who leads the global division of family offices.

This appointment adds to that of Don Plaus, who has been named head of Private Banking in North America, and Antonio Gonzales, new Head for Latam of the same section.

 

Raymond James Financial Names Paul Shoukry President and CEO successor

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Paul Shoukry, new President at Raymond James Financial | LinkedIn

Raymond James Financial has announced leadership changes as part of its succession planning process. Paul Shoukry, the company’s CFO, has been named President of Raymond James Financial, effective immediately. He is expected to become CEO of the company sometime in fiscal 2025, following a transition period, to succeed Paul Reilly, the current CEO, according to the company’s press release.

Shoukry has been an exceptional leader and major contributor to the company’s growth and financial stability, the memo added.

“Paul has been an exceptional leader and major contributor to Raymond James’ steady growth and financial stability. Serving as the firm’s CFO, as well as overseeing our Bank segment, he has consistently demonstrated that even as we grow, keeping our Private Client Group, advisors and their clients at the center of our business plans, while always embracing our values, will continue to be essential to our future success,” shared Reilly. “In addition to Paul, we have an outstanding leadership team who similarly embrace our vision for the future and are well-equipped to meet the demands of a dynamic marketplace.”

As part of the succession plans, Raymond James is also announcing other key leadership changes and appointments. Jeff Dowdle, COO, will retire and step down from his role at the end of the fiscal year. Scott Curtis, Private Client Group President, will become COO of Raymond James Financial, while Tash Elwyn, CEO of Raymond James & Associates, will become president of the Private Client Group.

Jim Bunn, Global Equities & Investment Banking President, will become president of the Capital Markets segment. These changes will be effective October 1, 2024, at which time Dowdle will be named vice chair and serve in an advisory role to facilitate a smooth transition.

About Paul Shoukry

Shoukry started with Raymond James 14 years ago working for Tom James and Paul Reilly in the Assistant to the Chair program. He has been the firm’s CFO since January 2020, responsible for the overall financial management of the company. He oversees the firm’s Bank segment, is a member of the firm’s Executive Committee, and serves on the boards of subsidiaries Raymond James & Associates and TriState Capital Bank.

Prior to joining Raymond James, Shoukry worked for a strategy consulting firm that focused on serving clients in the financial services industry. Shoukry earned an MBA with honors from Columbia University and graduated magna cum laude with a Bachelor and Master of Accountancy from The University of Georgia, where he was a Leonard Leadership Scholar.

The U.S. Remains the World’s Top Wealth Hub

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The United States remains the world’s undisputed leader in wealth management creation and accumulation, according to the 2024 USA Wealth Report from global advisory firm Henley & Partners.

According to the study, the U.S. accounts for 32% of the world’s investable liquid wealth, some $67 trillion.

From that amount, the U.S. is now home to 37% of the world’s millionaires: some 5.5 million high net worth individuals (HNWI) who own more than $1 million in investable liquid assets, the report adds.

This figure has grown by an impressive 62% over the past decade, well ahead of the global growth rate of 38%.

Although U.S. GDP is similar to China’s, the American powerhouse is far ahead in terms of liquid wealth, which the study simplified into listed company holdings, cash and debt-free residential properties.

Likewise, wealth per capita and the number of superrich is substantially higher in the United States. The United States has 9,850 centimillionaires, compared to 2,352 in China, and 788 billionaires, compared to 305 in China. Although China is home to just over 862,000 millionaires, its per capita wealth is only USD 18,800, compared to USD 201,500 in the United States, which ranks sixth in the world after Monaco, Luxembourg, Switzerland, Australia and Singapore.

To read the full report you can access the following link.

 

Private Equity Infrastructure Investment Set to Rebound Following Slowdown in 2023

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Private investment in infrastructure has had sustained growth, with a compound annual growth rate (CAGR) of 18% from 2018 to 2023. Stable returns, low cyclicality, the ability to pass through cost inflation, a frequently regulated operational environment, and high barriers to entry have guaranteed unlisted infrastructure a spot in state-of-the-art strategic asset allocations, according a Boston Consulting Group’s new report.

Despite the 2023 decline in dealmaking and fundraising, the outlook going forward is positive. As evidence of the forthcoming recovery in infrastructure fundraising, limited partners plan to increase their commitments to the asset class. Led by pension funds and private wealth managers, limited partners expect to boost their investments by more than $600 billion by 2027.

The report titled Infrastructure Strategy 2024: Creating Value Through Operational Excellence highlights that energy, transportation and digital are key areas of investment and that infrastructure investors must redouble their commitment to operational excellence.

Geographically, the great majority of private infrastructure investment activity in 2023 occurred in Europe and North America. Almost 75% of the world’s infrastructure portfolio companies are located there.

The most active areas for deal-making are energy and environment, transport and logistics, and digital infrastructure, with social infrastructure seeing increasing investor interest.

Aggregate deal value of private investment in the energy and environment sector, which is seeing massive tailwinds from the global decarbonization agenda, totaled $1.1 trillion from 2018 to 2023, accounting for almost 45% of all private infrastructure aggregate deal value during the period, the report added. Most privately held assets in the sector focus on renewables and energy services; Europe hosts the largest share of assets, followed closely by North America.

Private investment in the transport and logistics sector totaled almost $510 billion from 2018 to 2023, comprising approximately 20% of all private infrastructure investment during the period. Railroad, air-related, and sea-related projects make up the majority of privately held assets in this sector.

Private investment in the digital infrastructure sector from 2018 to 2023 totaled nearly $420 billion—almost 20% of all private infrastructure investment during the period. In 2023, most of the activity in Europe in this sector focused on privately held data-center assets, while the vast majority of assets in North America were in mobile data and end-user services.

On the other hand, as costs rise and the potential for returns from higher multiples and reduced debt diminishes, investors in infrastructure assets must take a more refined approach to generating returns. Operational improvements in portfolio companies will become even more critical to creating value.

In this regard, funds that want to be leaders will follow a clear playbook:

  • Focus on the full investment cycle. All too often, funds restrict their operational value creation efforts to extrapolating sell-side plans or devising plans that cover only the first 100 days after closing a deal. In contrast, leaders begin planning at the due diligence stage, developing and quantifying a clear hypothesis on how to improve operational performance throughout the ownership cycle to serve as a foundation for their efforts.
  • Assess all value creation levers. Leaders take into account every potential operational lever in the value creation framework in light of the portfolio company’s future positioning, including both top- and bottom-line levers—even if the value creation plan focuses on a selection of the most promising initiatives.
  • Institute performance requirements. By commanding a systematic value creation framework, leaders ensure that they have an excellent management team and the right capabilities in place. They also establish proven governance mechanisms and foster needed cultural changes—all in order to create the greatest value through operational improvements.

“Infrastructure investing has been put to the test by recent macroeconomic uncertainty, but the path to value creation is clear,” said Alex Wright, BCG managing director and partner, and a coauthor of the report.

To download the complete report, please click on the following link.

Wealth Management Grows in 2023 in Brazil Driven by Equity Funds

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Wikimedia CommonsBovespa, São Paulo

The wealth management industry in Brazil had a 7.5% growth in 2023, reaching $91 billion, according to data from Anbima (Brazilian Association of Financial and Capital Market Entities, as translated from Portuguese).

According to the association, one of the main drivers of this growth was the atypical movement in equity funds. Without the stock exchange’s help, the growth would have been more modest, at 1.8%, indicating a stability in the financial volume. In 2023, the Ibovespa (main index of the Brazilian stock exchange) rose 22.28%.

“Despite diversified portfolios, the segment’s clients have a large participation in private credit, which was impacted by the crisis at the beginning of 2023,” says Fernando Vallada, one of the institution’s directors and also managing director of Julius Baer, referring to the review of credit offers in Brazil’s capital market following the revelation of a $5 billion fraud in the balance sheet of Lojas Americanas company, at the beginning of that year.

“Another factor corroborating the lower growth was the drop in mergers and acquisitions,” explains Vallada. Equities, boosted by equity funds, saw an increase of 14.6%, representing 34% of the total invested. These funds, specifically, grew by 26%, reaching $21 billion in the year.

“Wealth managers did not reflect the optimism caused by the annual rise of the Ibovespa, stimulated by the beginning of the Selic rate cut in Brazil and the prospect of monetary easing in the United States. The interest rate still in double digits may also have motivated more caution in the sector,” says Vallada.

Multimarket funds fell by 5% in the year, reaching $19 billion, and currency funds faced declines, impacted respectively by market performance and the fall of the dollar against the real, with an 8% decrease of the American currency in relation to the Brazilian currency. As a result, currency funds fell by 59.6%, ending the year with $20 million invested.

ETFs double in size

However, there was a surge in ETFs, of 111.3%, totaling $ 560 millions. FIPs (Private Equity Funds) recorded an increase of 17.9%, totaling $ 5.46 billions, and Real Estate Funds closed 2023 at $ 3.26 billion, a growth of 22.8%.

Fixed income grows 8% with interest rates in double digits

Fixed income, still benefiting from the Selic rate in double digits, grew by 8%, reaching $27 billion. Tax-exempt products led the advance, such as incentivized debentures and debt securities from the real estate and agribusiness sectors.

The highlights were the income tax-exempt products. Among the applications with the highest investment volumes, incentivized debentures advanced 78.5%, totaling $1.76 billion, and LCAs (Agribusiness Credit Bills) grew by 18.4%, reaching $1.54 billion.

LCIs (Real Estate Credit Bills) increased by 90.8%, reaching $1.5 billion. CRIs (Real Estate Receivables Credits) recorded a rise of 28.5%, to $1.34 billion, while LIGs (Guaranteed Real Estate Letters) went up by 26.2%, totaling $0.74 billion. The growth of CRAs (Agribusiness Receivables Credits) was more modest, at 2%, to $1 billion.

SEC Fines Two Investment Advisors for Misleading Statements About Their Use of Artificial Intelligence

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Sanciones de la SEC
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The Securities and Exchange Commission (SEC) announced settled charges against two investment advisers, Delphia and Global Predictions, for making false and misleading statements about their purported use of artificial intelligence (AI).

The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.

“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” said SEC Chair Gary Gensler. “We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

According to the SEC, Delphia, Toronto-based firm, made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process.

According to the order, Delphia claimed that it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” In addition, the order finds that these statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed. The firm was also charged with violating the Marketing Rule, which, among other things, prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact.

In the SEC’s order against Global Predictions, the SEC found that the San Francisco-based firm made false and misleading claims in 2023 on its website and on social media about its purported use of AI. For example, the firm falsely claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “expert AI-driven forecasts.” Global Predictions also violated the Marketing Rule, falsely claiming that it offered tax-loss harvesting services, and included an impermissible liability hedge clause in its advisory contract, among other securities law violations.

Without admitting or denying the SEC’s findings, Delphia and Global Predictions consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000.

The SEC’s Office of Investor Education and Advocacy has issued an Investor Alert about artificial intelligence and investment fraud.