Amid the complexities of the upcoming US presidential elections, evolving geopolitical tensions and global macroeconomic trends, John Woods, chief investment officer and head of investment solutions at Lombard Odier Asia, provides insight into his market outlook and investment strategies.
In an interview with The Edge Singapore, Woods highlights that Lombard Odier’s base case reflects a soft landing.
“The data is telling us that a soft landing is the most likely outcome. If you look at the labour market consumption, if you look at investment, it is all suggesting a Goldilocks outcome – not too hot, not too cold,” Woods notes.
The message is also being communicated by the markets, with strong performance by the US. However, Wood expects increased participation by emerging markets (EM) in the coming months and greater opportunities as small- and medium-sized businesses continue to grow from strength to strength.
While the magnificent seven – Apple, Microsoft, Google, Amazon, Meta, Tesla and Nvidia – were once the only game in town, a tiny number of companies and stocks driving global risk, this is no longer the case.
“There is a broadening and deepening of opportunity”, Wood notes, adding that “there is a rotation of exceptionalism, from US exceptionalism to a wider spectrum of opportunities.” This too, is being communicated by fixed income markets.
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Woods points to the data that fixed income products, which is typically the first asset class to price in inflation risk and recession risk, have been experiencing stable returns.
Looking at year-to-date data, returns from treasuries have been reasonably flat, with attractive total return from investment grade, high yield emerging market (EM) debt, pointing towards a goldilocks market.
Honing in on global macroeconomic trends, Woods acknowledges that a main driver of market sentiment and outlook is the outcome of the upcoming US presidential elections.
See also: With Trump win boosting stocks, investors hunt for next winners
US presidential elections
Woods remarks that the election sits on a “50-50, knife edge” and is almost impossible to call, while there is possibly some momentum being spoken in favour of Trump, it can just as easily reverse in the subsequent days.
When asked about the impact of the election outcome on global markets, Woods notes that there is a “pronounced” difference between the two administrations, and to some, binary even.
Trump’s various proposals such as the tightening of border control measures, will impact labour flows into the US and as such, which will have a knock on effect on wages growth in the services sector. Subsequently, this causes inflationary pressures and affects the trajectory for interest rates and bond yields.
Similarly, Trump's pledge to place a 10% to 20% tariff on imports from all trading nations and an additional 60% tariff on imports from China, will inevitably lead to inflationary consequences, negatively impactingcapital flows into Asia.
“Asia needs to look closely at the value of the dollar, if the interest rate expectations start ticking higher, it could well be that the dollar starts to stabilise at current levels, or even possibly strengthen,” Woods says, adding that a “strong dollar is not Asia’s friend.”
If investors seeking growth and earnings see an upside in the currency they are currently invested in, the dollar, there is simply no need or desire to unwind it and invest in other currencies and equities.
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As a result, Woods believes that risk-taking in EM under a Trump administration is likely to underperform compared to US equities.
In contrast, Woods is of the opinion that a Harris administration has no intentions to put tariffs on trading partners and is likely to be a continuum of the Biden administration’s foreign policy, with a less stringent approach to border control than under a Trump administration.
This is likely to lead to a softer interest rate ratio and dollar weakness, boosting capital flows into Asia and stimulating greater appetite for risk taking.
Woods notes that sector performance in the US will also depend on the election outcome.
Under a democrat administration, sectors such as healthcare, utilities and capital goods would be preferred picks. While under a republican administration, cyclical sectors such as banking, gaming and defence are likely to perform well.
Particularly in the context of a Trump victory, energy and banks are likely to outperform other sectors.
The energy sector will benefit as markets will price in the growing likelihood and possibility of a peaceful conclusion to the conflict, for example, between Russia and Ukraine. Subsequently, banks will experience an uptick in growth on cheaper energy prices.
Historically, in the 12 months following any election, with the uncertainty around the outcome removed and out of the way, there is a general observation that equities perform strongly, particularly in periods where there are no recessions.
Put differently, Woods expects that equities would perform well under a Trump administration while bonds would perform well under a Harris administration.
How investors can position their portfolio
Woods states that in the wealth management sector, his role as a client’s advisor means that he is “not in the game of putting all on red or black.”
Amid the uncertainty and volatility, Woods reiterates that “a diversified, balanced portfolio is always the best, cheapest and most effective hedge that investors can employ.”
There could be weeks before the results are certain, as evidenced by the recounts in the previous elections. There are often substantial periods before the results become confirmed and in such situations, volatility in the market can develop.
“We do not want to be part of that,” Wood emphasises, “we just want to essentially remain benchmarked.”
“We are entering the election neutral equities, neutral fixed income and will be looking to take advantage of the results when they become clear,” Woods says.
Despite neutral equities, they remain overweight on Japan, explaining that it is likely to benefit notwithstanding a Trump or Harris victory.
In a Trump victory, it is anticipated that there will be support for the dollar, which in turn suggests weakness for the Japanese yen, which tends to be supportive for Japanese equities through the export channel.
Conversely, with a Harris victory, the risk of tariffs on Japanese exports diminishes, presenting a “reasonably positive” outcome for Japanese equities.
Additionally, they remain overweight on investment grade and high yield products within the fixed income group.
“As interest rates gradually fall, the US$7 trillion ($9.27 trillion) currently held in money market funds will rotate and migrate down the curve to investment grade,” Woods says, adding that he anticipates an attractive return of 5% to 6% over the next 12 months.
Woods also notes that Lombard Odier remains overweight on gold in the alternative space as he believes that central banks will continue to buy gold to diversify their FX reserve management. This continues to lend support to gold prices, with Woods noting a target price of US$2,900.
China’s economy
Another key macroeconomic trend that is likely to impact the global economy is the slowdown of the Chinese economy and its slew of stimulus measures.
Woods identifies three most important factors which could determine China’s growth trajectory.
First, the need for credible measures to absorb the estimated 48 millions units of paid for but unbuilt housing. Second, the success of measures aimed at promoting consumption within the economy. Lastly, the structural issue of the declining population, an area that poses a greater challenge.
In light of these issues, Woods notes that “all eyes are on this raft of measures that the government is looking to announce and unveil in the near future.”
“The market, I think, is extremely optimistic. It is priced anywhere close to RMB8 trillion ($1.48 trillion) to RMB10 trillion” Woods adds.
However, Woods doubts the government will provide that much stimulus and undo the deleveraging that the property sector has played through over the last four years. Woods is of the opinion that to undo that important effort would be a mistake.
“I think what the government is trying to do is unleash animal spirits. They are pouring oil on the economy to smoothen its functioning, they are pouring sugar on the market to create a rush and push prices higher,” Wood notes.
The stimulus measures are seeking to promote consumption and improve market sentiment among consumers.
Wood recognises that “iIf they do achieve their goal, this would absolutely be a very successful exercise in monetary stimulus.”
“But it is a big if. It really is a big if.”
Furthermore, the intersection between the China economy and the outcome of the US presidential elections presents a unique challenge for investors.
With regards to the impact of a Trump administration on US-China relations, Woods notes that “there is a growing view that Trump is a transactional business person and he is absolutely open to securing what he thinks is the best deal for the US, if it means adjusting tariffs with China.”
The 60% tariff on China is one that is extremely steep and would ultimately be passed on to US consumers. As such, Woods is open to the view that a “win-win situation” could be struck, where the 60% tariff is seen as a leverage or bargaining tool rather than an end goal.
However, regardless of the administration, Woods is of the view that US-China political tensions are likely.
“The idea that the US would seek to contain China, is a consensus across both parties, and I don’t think that will change anytime soon,” Wood notes, “It is just a multi-decade phenomena that is now part of modern international relations.”
Impact on investors
In view of this, Woods notes that “there is more to Asia than simply China.”
Given the geopolitical tensions, it is likely that there will be reshoring from China to other locations around the region, boosting inter-regional trade. Singaporean banks could be well-positioned to act as a funding vehicle for such inter-regional trade, particularly within South and Southeast Asia.
The renewed focus on India proves to be another potential source of opportunity. This was marked by Chinese president’s Xi Jin Ping’s recent meeting with Indian prime minister Narendra Modi for the first time in five years.
According to Woods, this is extremely important as it holds out the prospect of increased Chinese investment, particularly in manufacturing investment in India, which is viewed as a positive development.
Notwithstanding, the renewed focus on India, Woods identifies the commodity and energy markets in Indonesia and Malaysia, the health tech and banking sector in Singapore and AI proxies in Taiwan and Korea as other potential areas of opportunity.
