Emerging market assets often witness significant yet brief fluctuations around Election Day, with their performance linked to the electoral outcome. Historical data suggests that emerging market assets fare better during periods of a unified US government or with a Democratic president. However, this data is limited, spanning only eight presidential election cycles. 

To gauge this year's potential impact on emerging markets, it's crucial to analyze key channels of influence, including changes in US macroeconomic variables, trade policy, and geopolitics. The outcome of the US election could significantly affect these factors, influencing emerging market assets. Trump's presidency might lead to faster US economic growth but increase uncertainty in trade and geopolitics, while a Biden presidency could maintain the status quo. 

Despite political considerations, long-term portfolio construction should remain impartial, with emerging market assets playing a pivotal role due to their diversification benefits and potential for higher returns. 

Finsum: Don’t let political biases crowd out your investment decisions.

The rise in bond yields presents an opportunity for fixed income investors to find value according to Penter Bentley, the co-manager of the BNY Mellon Global Credit Fund. He notes that bond yields are close to their highest levels since the financial crisis and that conditions have been improving for investment-grade debt. 

Due to these developments, he anticipates healthy returns for global and regional investment-grade credit. A key factor is borrowers have strong balance sheets with lower leverage than before the pandemic. In fact, Bentley believes that certain segments within fixed income could perform better than equities. He identifies ‘fallen angels’, short-duration high yield bonds, and emerging market corporate debt as having the most potential for outperformance this year. 

Some uncertainties that could cloud this outlook including the election in November, the Fed’s ability to cut rates, and a tense geopolitical situation with Russia-Ukraine and the Middle East.  Thus, investors should expect volatility to persist all year which means more opportunities for active managers to outperform. 

Another place that fixed income investors can find value is with global credit. Historically, global credit has delivered better returns when markets are emerging from a downturn. In terms of global credit, Bentley sees opportunities in European credit markets and emerging market debt.   

Finsum: Peter Bentley, the co-manager of the BNY Global Credit Fund, believes that investors can find value in fixed income. He sees the potential for strong returns in global credit, short-duration high yield debt, and ‘fallen angels’. 

Gold prices ended the year on a strong note by making all-time highs and finished the year with a 13% gain. Next year, the outlook remains bullish due to expectations that real interest rates will decline as inflation falls and the Fed shifts to a dovish policy, leading to increased demand. JPMorgan has a year-end forecast of $2,300.

Some of the factors that could lead to gold outperforming are the economy being weaker than expected which could lead to more aggressive cuts by the Fed. Additionally, there is a risk that geopolitical tensions could inflame even further whether it’s in the Middle East or the conflict between Russia and Ukraine. Budget deficits in the US remain high for the foreseeable future with another close and contentious presidential election on the horizon.

Another positive catalyst for gold prices is that central banks are net buyers. According to the World Gold Council, they will purchase between 450 and 500 tons in the upcoming year. This is in addition to strong investing demand from ETFs which have seen substantial increases in assets over the past year.

The major risk to the outlook is if the economy remains robust enough so that the Fed can keep the fed funds rate elevated for a longer period of time. During the last 2 ‘soft landings’, gold had a total return of -1.6%, while Treasuries returned 16% and equities were up 33%.

Finsum: Gold prices are flirting with all-time highs. Recent catalysts for strength include geopolitical turmoil and expectations that the Fed is in the midst of a pivot.  

The Federal Reserve’s tightening campaign surprisingly has had a muted impact on the broader economy as evidenced by continued expansion despite the highest rate in decades. In terms of the stated goal of curbing inflation, results are mixed as well. 

However, the vector which immediately responded to tighter policy is real estate given that affordability has declined due to higher rates. In some markets, activity has simply cooled, while in those with poor fundamentals, prices are falling more precipitously. 

Within real estate, commercial real estate (CRE) is the most challenged given oversupply and the recent rise of remote work. For Barron’s, Rob Csneryik covers why some contrarian investors are seeing opportunity in the beaten-down sector.

In essence, it’s a buyer’s market with so many traditional sources of funding out of the picture, leading to more favorable terms and higher returns. Further, there is less risk with values already down so much. Many believe that office occupancy rates will start to gradually rise especially if the economy does weaken which would give employers more leverage to force employees back to the office. CRE would also likely benefit from a mild recession as it would compel the Fed to cut rates which would turn a major headwind into a tailwind. 

Finsum: Commercial real estate is the weakest segment of the real estate market. However, some contrarians see opportunities amid the carnage.

Ever since the Fed embarked on its tightening campaign starting in the early months of 2022, the real estate market experienced the most immediate impact due to rising mortgage rates negatively affecting home affordability.

Initially, publicly traded real estate stocks saw deep drawdowns while private real estate performed much better. Now, this gap is beginning to shrink as private real estate has been following public real estate lower. One factor is that it’s increasingly becoming clear that high rates are not going to disappear anytime soon due to the resilience of the economy and inflation. In fact, inflationary pressures seem to be reigniting given the recent strength in oil and auto workers striking.

In terms of when private real estate will bottom, some indicators to watch are an increase in transaction volume even at lower prices, a change in monetary policy, and increase in lending standards. Currently, all 3 are working against private real estate given that many markets are ‘frozen’ as sellers are unwilling to cut prices, while buyers don’t see many attractive deals at current yields. The Fed’s focus remains on stamping out inflation whether through further hikes or keeping rates ‘higher for longer’. Finally, lending standards are unlikely to loosen especially with so many banks struggling with balance sheet issues and/or an inverted yield curve. 

Finsum: Private real estate was immune to the weakness in public real estate for so long. Find out why this is starting to change.