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UBS Road to the midterm elections: Global market signals from the US midterms · UBS Trending

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  Hello everyone, and welcome to UBS Studios’ award-winning series
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  Road to the Election,
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  and Election Watch series.
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  This time around,
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  with a focus on the upcoming
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  midterm elections here
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  in the United States.
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  I'm Anthony Pastore.
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  Thank you so much for joining me
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  once again
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  As we discuss what matters most
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  at the intersection of policy and markets
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  Today, we are going to
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  get some global perspectives on the upcoming midterm elections.
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  I'm joined by my two CIO colleagues, Dean Turner from the UK,
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  and Jon Gordon from Hong Kong.
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  Dean, first of all, thank you for joining us.
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  It's really great to see you.
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  And I know there's a lot going on
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  in your own country,
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  but there's still a focus here
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  on what's going on
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  in the midterm elections
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  this November.
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  So let's do that broader European lens.
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  Why do the U.S. midterms
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  truly matter for Europe?
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  Yeah,
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  I think we’re not so much looking at it
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  more from the perspective
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  of the dramatic changes in policy.
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  I think when all is said and done,
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  the things that matter to Europe,
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  areas such as trade,
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  foreign policy,
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  and perhaps regulatory policy still reside largely with the
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  president.
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  So, you know, it's really how they evolve post the midterms
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  that is our focus.
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  Now when I think about the transmission channels into the European economy,
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  I think there's three key areas we've got to focus on.
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  The first is clearly trade.
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  And I don't think the focus here is so much necessarily a renewed trade war.
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  It seems to me that the agreement that's been struck between the US
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  and the European Union has largely been settled.
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  But what I'm focusing on more is how US trade and China trade
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  and how Europe gets brought into that broader discussion evolves.
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  And it matters because, you know, European trade with China
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  is a very important part of our overall external sector.
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  So any changes that happen there
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  which could be influenced by US policy,
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  could clearly have some implications
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  for how the European economy performs
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  over the next couple of years.
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  I think the second area is clearly with regards to defense spending.
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  And, you know, let's be clear about one thing.
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  Defense spending in the euro area is on an upward trajectory as Europe
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  seeks to assert some strategic autonomy
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  within this
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  crucial area.
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  But perhaps where the midterms can matter
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  is that the speed and urgency
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  with regards to how quickly Europe has to rearm
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  could
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  change as a result of the
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  of the midterms.
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  I think the third thing that I'm keeping an eye on as well, more broadly,
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  is with regards to US fiscal policy
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  and how that evolves post the midterms.
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  And look, I think we're all well aware
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  as investors,
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  the US bond market
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  remains the global benchmark
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  for bond markets.
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  And therefore, what we see in Europe is that our debt
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  essentially trades as a function of what happens in the US.
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  So any developments with regard to fiscal policy, either
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  positive or negative, can have spillovers into our economy.
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  And where that matters is, of course, you know, if borrowing costs in the US
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  are on an upward trajectory, then we may see some of that emerge in Europe.
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  And that could have an impact on on the economy,
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  not just in terms of economic growth, but also inflation
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  and how the central banks may have to deal with that.
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  Yeah.
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  It's, you know, it's easy to forget, Dean, how closely tied
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  our countries are economically and as you said fiscally.
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  And we're of course watching every tick on Treasury bonds here in the US.
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  And they're making multi-decade highs as we speak.
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  So, yeah obviously there's a global impact there as well.
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  So with that being said, when you think about an investor,
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  whether they're investing from the US or investing within Europe,
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  what should investors be thinking about to prepare for some of the risks
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  that you highlighted, especially, you know,
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  tariffs are still on the table, as you mentioned, obviously, fiscal policy.
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  How should investors navigate all of this?
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  Well, I think the first message
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  that we always give to investors is,
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  you know, don't try and trade
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  an election result.
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  Elections by themselves
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  are basically unpredictable.
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  And what we also see following elections
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  are surprise policy announcements.
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  So I think the first message that that we should have to have for investors
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  looking at Europe right now is that when you're approaching Europe
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  or for that case, any markets, is to ensure that you remain
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  sufficiently diversified because diversification
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  will be the key tool that can help us manage
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  some of those,
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  those potential surprises.
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  I think the second thing to focus on
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  you know, especially from a company
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  and also a fixed income perspective,
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  is to think about focusing on quality.
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  Now, some of those concerns
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  that I've mentioned,
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  whether they be around shifting
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  trade policy or whether they be around what happens to borrowing costs,
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  it's companies that can, you know, that have very strong product lines,
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  have high levels of profitability, that are going to be able
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  to manage these challenges if and when they do arise.
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  And, you know, it's our experience that focusing on quality
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  is really going to be one of the key things that gets us through
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  what could be a period full of surprises.
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  I think the third thing as well is to perhaps try and tune out some of the
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  short term noise and focus on some of the structural themes.
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  I mean, there's a few things I think we can be reasonably confident
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  about over the medium term, irrespective of what happens post the midterms.
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  And that's that, you know, a couple of the trends I've already mentioned.
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  You know, we know that
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  defense spending in the euro area is going to increase.
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  You know, we know that Europe has a demand
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  for strategic autonomy when it comes to its industrial base.
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  Europe also has a desire to ensure that it has
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  strategic autonomy when it comes to its energy supplies.
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  And these are key areas where we continue to expect to see strong investment.
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  And that should mean strong returns
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  for companies that are exposed to those areas,
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  irrespective of what happens with the short term election cycle.
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  I think the final thing I'd say is that,
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  you know, with this theme around high quality,
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  a focus on high quality bonds can also be key here.
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  If we think about the original point I mentioned, it's around diversification,
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  having exposure to those higher quality bonds and perhaps
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  less exposure to some of the higher risk credits
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  can really provide that stabilizing,
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  effort that we need within portfolio
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  and help us trade through what could be some,
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  some volatile times.
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  Dean, thank you so much.
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  Yeah, it's hard it's hard to ignore the geopolitical news
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  that's happening around the world every single day.
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  And you talked about defense spending in Europe.
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  We know that that's
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  obviously a key concern for you all that are in on the continent.
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  So we're keeping track of all of that. Thank you Dean.
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  Always great to get your perspective from overseas.
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  Good to see you.
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  And you. Thank you.
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  Great, great.
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  That was Dean Turner again from the UBS AG London branch.
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  All right.
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  So let's keep going around the globe and focus on what's happening
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  out of the perspectives from our colleagues in Asia Pacific.
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  So next up we have Jon Gordon,
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  a CIO strategist from Hong Kong.
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  Jon, great to have you on the show today.
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  Really good to see you.
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  Hey, Anthony. Yeah. Great to be here.
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  Of course, you know,
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  a lot of Americans
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  based here in Hong Kong,
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  tracking the election very closely,
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  and also casting their ballots as well.
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  Alright, so Jon, let’s
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  let's take a look from, as I said an Asia Pacific perspective.
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  Why should investors truly care about these US
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  midterm elections in Asia?
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  What are some of the key channels
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  through which the results
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  could potentially affect the region?
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  Yeah, look, so I think overall
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  the investment community here
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  isn't expecting a dramatic
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  overnight shift in policy
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  following the election.
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  That's because so many of the issues
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  that matter most to the region,
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  you know, including trade policy,
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  export controls, foreign policy, those are all heavily
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  influenced by the White House, regardless of who controls Congress.
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  But that's not to suggest that this election is
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  you know, seen as unimportant here.
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  What investors across Asia
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  will be watching is
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  whether the results move
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  the needle on policy
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  in I think four key areas here.
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  So you've got trade,
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  you've got tech,
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  of course AI,
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  fiscal policy,
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  and then geopolitics.
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  So on trade,
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  bipartisan concerns around China's technological and geopolitical rise
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  remain firmly in place.
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  So investors shouldn't expect
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  a wholesale reset in US
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  China relations on the back of the midterms.
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  At the same time, there are signs that both sides are interested in at least
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  maintaining stability.
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  You know, we had President Trump and President XI
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  just having their big dinner party in Washington.
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  That opened the door to selected tariff relief.
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  They are going to meet again at APAC,
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  and you know, the idea is that this top level engagement
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  should help keep the train on the tracks bilaterally.
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  Of course, AI and tech policy are perhaps even more important here.
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  Decisions around tech export controls out of Washington
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  on advanced semiconductor access,
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  on incentives to build in the US when it comes to,
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  for example, semiconductor factories
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  and also on AI regulation and frontier model oversight,
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  all have implications for the Asian tech companies
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  and the supply chains, many of which are based in North Asia.
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  Now, this has been a huge growth driver out here,
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  and companies are investing on the assumption
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  that the buildout will continue.
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  Now, I do want to turn to fiscal policy, Anthony.
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  That's another key channel to watch.
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  Whether Washington moves towards
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  compromise on spending
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  or returns to debt ceiling and shut down debates
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  could have a big influence
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  on the direction for Treasury yields,
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  the US dollar and for financial conditions
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  that reverberate across Asia.
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  So equities here are sensitive to the dollar in particular.
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  Finally, on geopolitics, you know that's another question mark.
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  What happens with the US Iran conflict after the midterms.
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  What happens with energy exports
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  and how much of those hydrocarbons arrive in Asia Pacific markets?
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  If the decision making process around seeking a resolution
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  or negotiating with Iran changes, energy prices come down.
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  That would be a clear positive for markets out here.
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  All right, Jon, so, you know,
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  is this seen as a potentially a major market pivot point for Asia?
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  What policy outcomes
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  do you think are most important for investors to track?
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  As I asked Dean,
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  it is truly how most of our countries are all very tied fiscally and economically.
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  Yeah. Look, midterms.
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  Very exciting to watch for into politics,
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  but historically,
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  not really a major
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  lasting risk event for Asian markets.
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  Anthony, if you look across
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  sort of the modern midterm
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  election cycles
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  equities in Hong Kong,
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  mainland China and broader Asia
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  have generally moved higher in the weeks and months following result,
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  and that's really regardless of which party wins the day.
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  As with the US market, global investors looking at Asia are
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  pretty hyperfocused right now on AI,
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  the investment cycle there and on earnings, right.
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  So speaking with investors and fund managers out here,
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  probably the key unresolved question I hear is
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  what the midterms will mean for the AI build out in the US.
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  Many of us enjoy using AI in our day to day life,
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  but few of us like the idea of competing with data centers for power, water,
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  or grid capacity if you’re a, you know, regular consumer.
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  As you know, that is a very real concern among US voters, Anthony,
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  for electricity costs
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  and also the infrastructure strain and the increasingly also
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  the societal impact of AI on things like jobs. Right?
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  So I think the view here in Asia
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  is that, say, if US permitting
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  or expansion slows,
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  that could have a meaningful
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  ripple effect across North Asia equities,
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  some of our most important companies
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  are the semiconductor manufacturers,
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  the memory producers.
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  You've got semiconductor manufacturing equipment makers further down the chain.
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  You've got networking companies.
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  You've got cooling suppliers, the power
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  providers, the optical AI cables as well.
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  So they're all very deeply integrated into the US led global AI ecosystem.
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  Now, it's probably fair to call this more
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  of a timing risk than a structural risk.
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  A slower rollout, rather for AI infrastructure in the US
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  is very different from saying that we expect a decline in AI demand.
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  That's not the case at all.
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  I think the second thing to think about is
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  you know, what the regulatory impact
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  could be for US Access to Chinese AI models.
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  We know that China is offering very competitive, low cost models.
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  Many enterprises in the US are taking advantage of that.
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  The gap between US Frontier Labs
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  and Chinese Open Way models tends to really sort of yo-yo,
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  as you know, one rushes ahead and then the others catch up.
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  But the offering, I think, on balance, is very capable.
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  Could Congress enact AI model safety requirements or auditing standards
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  or governance rules that really act in a way
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  as an impediment to Chinese AI adoption in the US?
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  That's an open question. We’ve certainly heard rumblings.
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  We do think there's plenty of room
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  in the global market for both ecosystems to thrive, Anthony,
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  but I think, you know,
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  policy that comes out of the next Congress
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  would have a bigger bearing on who captures the global profit from AI,
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  where investments globally flow,
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  and which parts of the APAC tech ecosystem here
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  are likely to outperform over the next few years.
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  All right.
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  And that is going to do it for today's episode.
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  Thanks again to my guests Dean Turner and Jon Gordon from joining us overseas.
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  And thank you for joining us today.
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  There's a lot more information on the upcoming midterm elections
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  and its potential impact to policy,
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  markets,
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  and of course, your portfolio
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  at ubs.com/ElectionWatch.
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  Plus, if you take a look at the website,
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  a recent publication is up there
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  with articles from Dean and Jon
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  to go into more depth
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  about what the expectations are overseas.
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  Plus, there's a lot more content
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  from UBS and of course, the CIO,
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  including podcasts and videos
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  at our website, ubs.com/views.
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  Plus, mark your calendars
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  On Thursday, November 5th at 1 p.m.
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  Eastern Time,
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  We are going to be having a special
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  CIO live stream
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  that is going to focus on
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  the aftermath and results
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  of the midterm elections here in the US.
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  Again, that’s Thursday, November 5th,
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  1 p.m. Eastern Time.
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  Don't miss it.
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  Thanks for joining us, everybody.
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  From New York City, I'm Anthony Pastore.
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  We'll see you next time.