Jeremy Fasquelle
Hello and welcome to a new weekly podcast from BNP Paribas Wealth Management. Today we are looking at the key lessons from the US midterm elections and the democratic blue sweep. To discuss this, I'm joined by Guy Ertz, Deputy Global Chief Investment Officer at BNP Paribas Wealth Management. Hello Guy.
Guy Ertz
Hello, hi.
Jeremy Fasquelle
Guy, let's start with the elections. What was at stake this time?
Guy Ertz
Well, in the midterm election, of course, it is about the majorities at the House and the Senate. The Democrats were actually to some extent expected to gain at least the House, but eventually also the Senate. The election outcome was much clearer than that. The Democrats really achieved a strong result, gaining the majority both in the House and the Senate. And thus we have here some shift in the balance of power for the next two years that we are witnessing. Now, we need to still remember that the president retains significant executive authority, particularly regarding trade, immigration, and foreign policy, and also can veto some of the proposals by the House and Senate.
Jeremy Fasquelle
So a big change in the balance of power. What explains this result?
Guy Ertz
From the economy, and it is a lot about the economy as usual. On paper, actually, we have been seeing solid growth, low unemployment, we have robust spending. But when you look actually a little bit more in details, you see that there is some gap between the different households and in particular a gap in terms of affordability because inflation has been rising and inflation is still at a high level. And of course, in the recent month, there was also some additional pressure on the energy side linked to the strikes in Iran. So falling purchasing power among especially lower income households has been in some way outweighing the strength of the global economic developments and thus there was some frustration in some parts of the society.
Jeremy Fasquelle
So affordability was clearly a key issue for voters. What does this mean for policy?
Guy Ertz
Taking it from the policy angle and even more from an investor perspective, clearly what is worrying markets somewhat in this blue sweep is that we could see some increased scrutiny of AI, AI safety, antitrust, data center and consumer protection. These are really the themes. Now if there are some major changes that are proposed, as I mentioned, the president still has a veto right when it comes to federal regulation. Now, what will, however, be the case is that some of the decisions will be taken more at a state level. So we will have to monitor that. But all in all, we think that this will not really break the trend in terms of the AI investment boom. It could maybe slow the trend somewhat, especially when you look at it over a one, two year horizon. But it could at the same time be also such that it avoids excess and that it could even lengthen the investment cycle. Also something that investors are monitoring is the implication in terms of the fiscal side, in terms of deficit and debt. And it is likely that there will be some negotiations, especially going into year end between the Democrats and the Republicans, and that the outcome could be higher spending in a kind of compromise. And there could be higher spending on the one hand really on healthcare, social program, but on the other hand also more on defence. So it could be that actually deficits could be rising and that could be rising.
Jeremy Fasquelle
We could see some changes, but probably no major shift in the short term. And finally, what does this mean for financial markets?
Guy Ertz
Well, as I mentioned, the financial market concern is really about the measures that could limit the development of the data centres of the AI investment boom. Again, it is unlikely that we will see a major slowdown and an important sequence of regulation in the short term. It could be coming maybe at some point later on, but even then, major decisions could be even vetoed by the president. So we think the investment boom will continue and it could even be the case that it could turn out to be more stable and lengthen the cycle. Then we have issues, of course, related to the fiscal dimension. I spoke about the fact that we could see higher deficits, higher debt. That could pressurise somewhat the long-term interest rate, the long maturity bond yields, in particular the 10-year Treasury yield. That could then mean also that we could see the 10-year yield rising again, somewhat breaking through 5% again. We have seen recently a decrease, but going into the late part of the year and the negotiations on the fiscal plan, we could see yields rising again somewhat. So that's something investors have been a bit or should be having on the screen. And also related to that, I mean, relating to the potential of higher deficit, higher debt, we think also that this development could support further our assumption of gradual dollar depreciation. So that, of course, is also an interesting driver. Behind that general outcome, there is also still the issue about the conflict in Iran and to what extent eventually the results of the election are potentially decreasing here the probabilities that there could be further strikes. And that is also the reason we think why oil prices have already started to come down. And we do believe that over the course of next year, oil prices and gas prices could fall further.
Jeremy Fasquelle
So quite a mixed picture for investors. The blue sweep changes the policy backdrop, but the immediate investment message remains nuanced. AI spending should remain resilient. Equities may benefit from greater visibility, while bond yields and the US dollar reflect rising fiscal risks. Thank you, Guy. for this podcast and thank you for listening. If you enjoyed the episode, please like, share and subscribe on Apple Podcast, Podcast Addict or Spotify. And for more research, visit the BNP Paribas Wealth Management website. Thank you and bye-bye.