null Episode 12: CIOs Perspectives: Election Implications
Double Take podcast

Episode 12: Election Implications

00:43:54
Elections 2020 Double Take podcast Audio Equity Fixed Income Multi-Asset
October 2020
Episode 12: Election Implications

In this special Double Take round table, Mellon’s Chief Investment Officers discuss potential presidential outcomes and how they could impact markets.

Raphael Lewis: Hi everyone, welcome to another special US elections episode of Double Take, the Mellon podcast. I'm your co-host, Raphael Lewis, Mellon's director of investigative research.

Jack Encarnacao: And I'm your other investigative researcher and cohost, Jack Encarnacao. Today, we deviate slightly from our established format by giving not a double take on the upcoming elections, but rather a triple take. We're issuing, you could say, a triple take alert right here off the bat. And if I'm not mistaken, Rafe, that represents what, a 50% take bonus for our listeners?

Raphael: I think you deserve an A+ in Math, Jack. Yes, you cannot find a better deal on takes in podcast land.

Jack: Exactly.

Raphael: I think that's fair to say.

Jack: Right, so buckle up, because today we have not one, not two but three Mellon chief investment officers to offer their perspectives and prognostications on the presidential and congressional elections that are looming here on November 3rd.

Raphael: That's right. Joining us today are John Porter, Mellon's head of equity, as well as the lead portfolio manager for Mellon's small and mid cap growth equity strategies, Dave Leduc, Mellon's head of fixed income investing, and last, and certainly not least Dimitri Curtil, who is Mellon's multi-asset leader. Together, this troika boasts roughly 70 years of investment management experience. They've seen plenty of topsy-turvy elections in their lives, both before and after getting into investing. And it's so happens they've each penned thought pieces on the elections that you can find by pointing your trusty browser to www.Mellon.com. And one quick programming note here, as we have now for six, seven months, this podcast is coming to you from our home offices, being recorded on Skype. So please forgive any dog barks, kids yelling, doorbells, et cetera. Gentlemen, welcome to Double Take.

Dave Leduc: Great.

John Porter: Thank you. Great to be here.

Dave: Glad to be here.

Jack: Great, everyone's here.

Dimitri Curtil: Glad to be here.

Jack: Everyone's ready to go. It sounds excellent. So folks, I know our listeners can't see our esteemed guests, but let me assure you, they don't look old enough to have 70 years of investment experience. So that said, they do. So, let's tap into that wealth of expertise in history. John, you first. So conventional wisdom on Wall Street says a Republican win would benefit small business, large banks, high-end consumption, fossil fuel energy companies, for profit education. A Democratic win benefit renewables, infrastructure, healthcare companies that have thrived under Obamacare, social services businesses. There seems to be so little overlap there. So how, if at all, can you position long only US equity portfolios heading into an election when the policy positions of the two candidates appear so amazingly divergent? Is that positioning even worth doing, John?

John: No, I really don't think it is, Jack. I mean, it's an important question, but when you have such a binary issue, it's very difficult to make a call right now. As all of our listeners know, many factors and issues go into constructing portfolios, and certainly the political landscape is an important component. But to try and position a portfolio around, again, such a binary issue as this election, I don't think that would be prudent. Investors have to assess what's discounted in the market and look at the scenarios that could impact the market environment. And certainly looking at this election, I think it's important to have a game plan for how you're going to think about portfolios once we know the election outcome, but to try and position aggressively for one outcome or the other ahead of the election doesn't make sense to me.

Raphael: That answer makes a lot of sense to me, John, thank you. So, Dave Leduc, fixed income guru, let's pose basically the same question to you. When you look across Mellon's fixed income portfolios, how have you and your team positioned exposures to account for these binary outcomes?

Dave: Yeah, I agree with John. I think our investment process is designed to look through some of these potential near term volatility events. And I think the history of the elections, and John, I think alluded to this, is it's very difficult to predict not only the outcome as we saw in Brexit in the last presidential election, but in this election, you actually have multiple plausible outcomes depending on who takes control of the Senate. So, you could have a blue White House, and a red Senate, or vice versa. So given the fact that it's difficult to predict the outcomes in any case, and there are many different outcomes which may impact certain sectors that we're looking at, particularly in corporate facing income sectors, I think it's really, really difficult to try to position a portfolio for an event like this.

Our view is that the drivers of investment returns over the medium term are going to continue to be the things that have influenced the market for the greater part of this year. And that includes primarily the liquidity provided by easy central bank policy, and namely the Fed. So those will be the things, and the general trajectory of the economy, and the improvement of the economy will be the things that we think will drive longer term, and even medium term, investment performance in fixed income markets. And my guess is, in other risky investment markets as well.

I would say that there is certainly the potential for volatility around the election. And in particular, in and around the election, in the event that there's a tested outcome, and other challenges that may persist maybe through the end of the year on the election. But we're certainly not positioning the portfolio for that. I think that one of the things that we have done in portfolios, and this is less around just who wins the election, more an acknowledgement of some of these markets that have run fast, is we have cut back positions in high yield bonds and other areas that in certain issuers and companies where the investment performance has actually been quite strong over the last several months. And our view is that if you're heading into an environment where there's going to be some short-term volatility, just because some of the value is not there anymore, we have shaved some of the, what we call sharp edges off of some of our client portfolios that allow investments, and some of those traditionally higher volatility historic areas.

Jack: So Dimitri from the multi asset perspective, after reading your thought piece on the election, I came away really feeling sympathy for portfolio managers heading into this thing. Because you rightly pointed out that the 2016 Brexit vote, the 2016 Trump election, these outcomes really were not  at all what investors expected. And here we are in 2020 wondering if we're on the precipice of another surprise. So is there anything we can take, do you think, from the 2016 events that's worth applying to 2020 when it comes to positioning multi-asset portfolios in advance of the election?

Dimitri: It's a good question. I think the takeaway is that polls can have a wide arrow bend, based on what we observed in 2016 around Brexit, as well as the US elections. So I would say, we should expect the unexpected. In that the markets positions along those lines, it's very hard to predict a binary outcome, like an election. So the way we positioning ourselves is trying to be ready for the baseline scenario, and prepare for the worst. We continue to invest based on fundamentals, and assessing the relative attractiveness of each asset class. It's not worth trying to build a portfolio around specific binary events.

I'd like to add something regarding the one thing that's for sure, and I think Dave touched on that, is the fact that there will be volatility, and volatility is expected. Markets do not like uncertainty, but this is a specific type of uncertainty that we're talking about here. This is expected uncertainty. There's a pretty clear timeline of when the actual event happens. November 3rd. The timeline regarding the resolution is less clear. It potentially can drag out. There might be some expectation regarding a dragged out and messy resolution process for the election. But eventually potentially in early 2021, there will be a resolution one way or another.

And the markets are pricing that already. They understand the timeline. They understand the risk around the event. If you look at the options market, the equity options market, in particular, the VIX term structure, you clearly see an increase in risk premium pricing around November, and into December as well. So, there is this expectation of a lengthy resolution process around the election. So more vol for longer, that's the general idea. We favor neutral and balanced positioning, sticking to our medium term drivers in terms of exposures. And we want to be ready to deploy risk post election, when the markets digest the outcome and potentially market dislocations might provide investment opportunities that we'd like to take advantage of.

Raphael: Very interesting. So what I'm hearing from all three of our CIOs is really they've got their eyes on the medium term horizon, not going to position too actively ahead of a binary event that is inherently unpredictable. So, let's turn it to John Porter. So in your thought piece on the election which, again, for all our listeners all these thought pieces by our CIO guests today are available at www.Mellon.com. So, John, you had stated that, generally speaking, a Biden win would be less supportive of U.S. equity markets, given his intent to raise corporate tax rates, increase regulation, increase on the high end of the earners when it comes to the individual income tax rate, higher support for labor versus capital kind of generally. I thought that was an assertion definitely worth exploring, given the person that Biden is running against. Where my mind goes, I guess, is volatility. 

So, we have Biden's entire pitch seeming to be elect me and we'll return to "normalcy," and inherent in that assertion to me is better relations with our allies, fewer trade disputes, less policy through Tweeting, and on and on. So, I guess what I'm saying is, is there a case to be made that a Biden Presidency could, on balance, create a better setup for a sustained market stable ... Try that again. Is there a case to be made that a Biden Presidency could on balance create a better setup for sustained market stability and thus growth?

John: You make a good point. A Biden Presidency would certainly likely bring about improved international relations and, frankly, just less drama coming out of Washington, both of which I think all of us would welcome. From a market perspective the prospect of rising taxes, and increasing regulation is a formidable concern. You know, historically rising corporate taxes actually haven't been in and of themselves a negative for the market. In fact, they've often been accompanied by an increase of growth, because they typically had stimulus programs attached to them. My concern about the dynamic right now, and the prospect for rising tax rates, is that the increase in tax rates are more necessary to fund these extensive outlays that we've already made to try and support our economy through this COVID crisis. So I think that's the challenge. 

Just to highlight how difficult it is to label one outcome as being good for the markets or bad for the markets, I would highlight that in the first debate Joe Biden talked about, really backed off his support for the Green New Deal, which in and of itself wasn't that significant of a statement, but I think it potentially has broader ramifications when you think of it. If this is the beginning of a move by Biden from more of a progressive stance to a more moderate stance I think the market would, frankly, be very excited to see him take a more moderate stance. So, I think there are certainly many plausible scenarios where a Biden Presidency ends up being quite supportive of equities.

Raphael: So, turning to you, Dave, Dave Leduc, I wonder how much the elections really truly matter to fixed income investors? You know, when you have the Fed stating they'll maintain near zero-level interest rates for years to come. At these levels of accommodation is there anything that can happen in the White House race that can move the needle?

Dave: Yeah, it's interesting. As we've looked at financial performance over the last several months it looks like there's nothing that can move the needle. We've had some news stories, and various items, come out that have created some near-term volatility but, again, I think the market is basically investing on in Fed we trust, and I think the expectation is that monetary policy accommodation is going to remain strong for as far as the eye can see. I think this has enabled the risky asset markets to look through the recent dramatic drop in GDP and, frankly, the damage caused to a lot of areas directly as a result of the COVID pandemic in those sectors most directly impacted by them. 

There is, however, a couple of outcomes that may have different impacts for certain fixed-income areas. So, I think the general prevailing view would be that the market likes dysfunction in Washington, and if you have divided government without a blue wave or a red wave in every area that that's something that will probably be generally well accepted by markets overall. 

I think in an outcome where you had a complete blue wave, those concerns that John noted about the market being concerned about higher taxes and more regulations, certain industries, our sense is that there's a possibility that those things, those concerns would create perhaps more volatility in corporate and, particularly, high-yield bond markets. We saw those markets react very, very favorably to positive tax policy developments in the Trump administration, and I think the reversal, or the potential for reversal, of those supportive factors would certainly create some at least short-term concerns. 

I think in a red wave there's ... Well, that may be viewed more favorably for corporate-type investments. One of the outcomes is what it would mean for certain markets like muni bonds. I think in a blue wave muni bonds can clearly get supported by the potential for higher taxes. Perhaps in a red wave some of those things are viewed less favorably, although I think the long-term demand for munis in general is going to be pretty strong. The last thing I'll say is, one of the interesting potential outcomes is if Trump gets reelected but Congress remains divided, there may be an increased incentive for that administration to continue to pursue executive-type policies like the trade war. So, we could see this dollar weakness trend that we're expecting, and that we've seen play out so far. That could get derailed a little bit if that outcome is what happens?

John: So Dave, you made an interesting comment there about in Fed we trust, which I think is sort of a prevailing sentiment across all of capital markets. The Fed is supposed to be politically neutral, politically agnostic, whatever the right way is to describe it, but there's certainly been different situations where people have tried to exert pressure on them. Do you think the Fed's behavior over the next 12, 24 months will be impacted by this election outcome one way or the other?

Dave: Yeah, it's an interesting question and I know our Chief Economist, Vincent Reinhart, has raised the possibility that either candidate there's an open question as to whether Jay Powell is still chairman of the Fed after February 2022, depending on whoever wins. Either one of them may want ... It's possible that Trump would want a more favorable Fed Chairman, or at least a more acquiescent one, and Biden, similarly, may want someone more aligned with their interests. So, it's a good question. I think our view at the moment is that Fed policy, while it's adapted, has basically been adapting primarily to general economic conditions. Their move to more tolerant inflationary stance I think is going to be in place regardless of who wins, at least unless there's a change in Fed leadership in 2022.

Raphael: That's good stuff. Let's turn to Dimitri for a moment. Dimitri, in your election writeup you had stated that the markets are rightly looking through the current recession. Given the unprecedented levels of policy support we're seeing that Dave's referring to, progress being made toward a COVID-19 vaccine, and just more luck and skill when it comes to the treatments and, thus, a return to kind of the status quo anti-pandemic. I wouldn't disagree for a moment, but I would point out that the recipes that each of these presidential candidates is bringing to how to stimulate and grow the U.S. economy kind of on the other side of this election are pretty different. You got Biden, just as an example, he's pledging a green tech boom that would create jobs to replace the fossil fuel heavy industries and, of course, hurting those jobs a bit. Whereas, Trump is touting a payroll tax cut. Kind of when you look at these different prescriptions for how to exit the recession, where does your head go when it comes to risk in the medium term?

Dimitri: It's a great question. The two candidates offer a very stark contrast, not only in terms of style, but also in terms of policies. My sense is that the impact would mostly be regarding domestic policies and the impact in different sectors of the economy that this might have. I think both Dave and John touched that in terms of equity and fixed income impact. We expect a Trump Presidency to be kind of more of the same, tech tax cut, payroll tax cut, or more corporate tax cuts, less regulation. Biden Presidency likely leading to partial rollback of the corporate tax cuts that Trump enacted, potential focus on a climate change policy, the green policies like you mentioned, likely infrastructure spending. The question to ask is whether those agendas will be pared down once the candidates become President.

A lot of what they can accomplish is going to depend on which party controls Congress, both houses of Congress. Divided government might create a situation where some of the more aggressive policies they might not be able to enact. I would say in general, we expect big government, whether the Republicans or Democrats are in the White House. That means continuing stimulative policies in terms of fiscal policies being very loose. Both governments should continue to stimulate the economy to the most they can. In terms of trade policy, we expect the uncertainty around trade policy to persist. They use maybe different tactics in terms of how they're going to perform their own trad e policy, but both parties seem to be in agreement that there will be more protectionist policies put in place, potentially more trade tensions, especially as it applies to China. That probably is going to lead to a continuation of the de-globalization trend that we've seen happen over the last couple of years. 

Arguably, when managed the most for asset classes, which is what we deal with in a multi-asset world, is the stance of Central Bank and Central Bank policies in general. That matters more in election, matters more even than domestic policies. The reason being that this impacts investors demand for risky assets over the medium term and the long-term. In that front we expect the monetary policy to continue to be extremely accommodative. The Fed will remain on the whole, at least until 2023, based on the communication. We expect a very low rate environment for the foreseeable future. On top of that, the new Fed strategy that was just laid out recently by the FOMC erroneous average inflation targeting is a big deal. It's a paradigm change. The Fed continues to endorse its dual mandate of maximum employment and price stability, but now it can be achieved in terms of targeting inflation on average of 2%. So it's more of an outcome based policy at this point, potentially more asymmetric and flexible, which is very fit for the current environment.

This new framework should allow for modest inflation overshoot before the Fed tightens policy rates. They've also clearly laid out that they will continue to use the full spectrum of policy tools that they have at their disposal, not just by targeting a policy, right, but also QE, quantitative easing, asset purchases and so forth. So altogether we expect very stimulative policies, domestic front supported by very supportive policies in terms of monetary policy as well, and by the central banks and the Fed primarily, which should create an environment of low rates for the foreseeable future, which should support growth. So that's how we think about it in terms of monetary asset over the medium term.

Jack: Yeah, Dave. Dmitri put it on the table, the average inflation targeting paradigm shift here that obviously has some implications for you. I wonder what John's thoughts are as well. First, if you could speak to that, and how you're thinking about it, and if the election holds anything in the balance there, in terms of executing on that new outlook, that new program.

Dave: While we don't see the catalyst for near term inflation as we look across markets and we look at some of the structural issues and the capacity that remains out there in the U.S. market, it is the fact that the Fed is likely to leave policy rates on hold even past the point where they start to see inflation rising. Right? In terms of try to meeting their longer term policy objectives.

So I think while we don't see the catalyst for near term inflation, certainly not in the near term outlook or in a horizon that encompasses what we're talking about in terms of election outcomes, I think it's a risk, right? I think anytime if you look across markets, almost most participants seem to be universally discounting the possibility of inflation, and when that's the case, that worries me. Because it means that that outcome, even if we can't see how it develops, is not being particularly priced into not only inflation expectations, but also the impact for higher interest rates and what that means for discount rates for riskier assets. So I think over the longer term, it's something that we're cautious about and we're paying close attention to, but certainly don't see any near term risks on that front.

Jack: Cool. John, any thoughts on the inflation piece?

John: Really I would just pile on to both Dave and Dmitri's thoughts, and I like what Dave said. He's right that a sustained increase in inflation wouldn't be unexpected by the market and it's certainly a broadly held consensus that inflation isn't going to be a factor that markets have to digest anytime in the near term. Anytime you get something that has as widespread of a belief as the lack of inflation has right now, you start to think about the other side of the trade. But at the end of the day, I just don't see any imminent catalysts, and when I say imminent, I'm thinking next 12, 18, 24 months. I just don't see any catalyst for any kind of sustained increase in inflation that investors need to contemplate in sort of the near to medium term horizon.

Dave: Yeah, and I agree with John's assessment on that horizon and the prospect for it. As much as I am worried about the fact that no one's discounting it, I agree with him completely that we don't see it right now.

Jack: Very interesting. John, in your paper, you expressed kind of longer-term bullishness about equities, in part because cashflow yields should remain significantly higher than bonds, I should say. So can you explain for us why you feel confident about that and where could you get tripped up in that outlook?

John: Yeah, it's an important issue and it comes back to sort of one of the common threads in the conversation here, which is inflation. Look, certainly relative to bonds, given where interest rates are, I think equities offer a more compelling long-term outlook. When you look for the past several years, we've been in a low growth, low inflation, low interest rate environment, which has been a terrific environment for stocks broadly. The key variable to watch is inflation. As long as inflation remains tame, which will then keep interest rates low, that's really an ideal backdrop for equities, and within equities, it's a particularly favorable backdrop for growth oriented equities.

Raphael: Well, Dave, let's turn to you then. You're the bond guy. On our last episode we had on a markets historian who basically said he's looking at what's going on with gold prices right now and seeing that a lot of folks out there seem to be baking in higher inflation into their outlook. So I'm just curious what you make of John's point of view on that broadly and where, if anywhere, you disagree.

Dave: I think one thing that's clear is that if you look at developed market interest rates around the world, they're not pricing in, at least on the face of it, the possibility of inflation, right? So while there are certain asset markets where people may be allocating to it, as I look at both inflation rate breakevens, and I look at ... I am looking at my screen right now and I can barely find a market in a developed market that has a 10 year yield above 1%. The only one that's on the screen today is Greece hovering around at 1%. So it's clear that it's hard to find yields in a lot of the fixed income markets right now. I would only point out that there are areas even in fixed income where you can find higher yields than that, particularly in the high yield bond market, where yields are about five and a half percent as we're doing this podcast today. Emerging markets, both local currency and hard currency, are about a little over 5%.

Then the other interesting area, which I think probably benefits from some of the same dynamics that John and Dmitri, I think, have talked about in terms of things supporting equity markets is the area of fallen angels in fixed income, which has ... those are those investment grade bonds that have gotten downgraded to high yield rating. Typically when that happens, you have a bunch of investment grade issuers who get pretty upset about that development, are often forced to sell those bonds, which creates a situation where they traded a significant unreasonable almost discount. Historically, those assets have really generated longterm returns. So it's tough times in fixed income markets. I'm sympathetic to people that worry about inflation longer term. Agree that I don't see it in the short term and also agree that yields are low, but there are places to to find yields in fixed income, and they're probably those areas that are going to be correlated with positive outcomes in equity markets as well.

Jack: Dmitri, you're kind of the neutral party here on this question, given that you multi-asset portfolios combine equities and fixed income instruments. So what's your take? Are you overweight equities or bonds?

Dimitri: I'm so glad that I don't need to choose between either equity or bond, and that's the benefit of investing in multi-asset. I mean, at the end of the day, it shouldn't be equity or bond. What we want to do is find the right balance of equity and bonds to potentially in the process capture diversification benefits. Arguably, diversification is the only ... or maybe the last free lunch out there in finance. I mean, diversification across asset classes, obviously equity versus bond, but also within asset classes and potentially diversification across times as different return engines can perform at different times in different conditions. The question regarding overweight, it's interesting. One, I mean, the concept of being overweight implies that you have a benchmark. In the multi-asset strategies, we have a lot of different products that target different objectives, and they have their own reference portfolio reference benchmark. I would say on aggregate, we're fairly neutral in terms of the respective benchmarks for each product, and the reason being the following.

When you look at each asset class, so equity and bond on a standalone basis, you can form a view that they're fairly rich versus their own history. Equities appears rich today on evaluation basis across different dimensions, not just in the U.S. but globally as well, but primarily in the U.S. But at the same time, the fundamentals are very strong and is clearly a domain for buying growth. This custody of growth is probably increasing the premium and variations in some of these markets that can actually deliver on growth. We're also seeing very strong earnings recovery, at least into 2021. We talked about the Fed policy and stimulus coming out of Washington likely to continue going forward. So those are all reasons that in terms of fundamentals should continue to support equity despite the fairly rich valuations at this juncture.

When you look at bonds standalone basis, the term premia are fairly unattractive. Depending on which model you use, the turnout should be close to zero negative across most developed markets. So not a very strong compensation for taking duration risk at this juncture. Having said that, most sovereign bond markets do offer some form of positive carry, carry measured as a roll down in the coupons you expect to earn. Because we typically you invest in derivatives, you can also look at the funding rate that's backed into the derivatives as a contribution to the carry. The reason it matters is that when you have very negative funding rates in Europe, for example, that actually turns can become a positive contribution to the carry and may make some of those instruments less unattractive. Bonds, not super attractive valuation wise. Some positive carry, but primarily the reason we like to have bonds in conjunction with equity is because of the hedging benefits. Diversification versus growth assets should continue to prevail going forward. It might not be as strong as it used to be, but we fully expect bonds and fixed income in general to rally very strongly in case of a liquidity shock or any kind of safe haven flows that will materialize. When you look at equity versus bonds, one versus the other, I agree with John. Equities tend to be relatively more attractive versus bonds on the basis of earnings and free cash compared to the low bond. He said that bonds have the role to play in a multi-asset portfolio to provide diversification. If you look out there, there are actually very, very few assets that offer a negative correlation to growth assets and a positive carry, or actually not a negative carry at this point. So that's what I would say in terms of my perspective on equity versus bond.

Raphael: That was very interesting, Dmitri. So the next question I want to ask emanates from something that Dave LeDuc put in his election writeup. I actually think it'd be great to have John answer it first. So Dave, in his election note, says that there's just a ton of idiosyncratic risk out there as the fat tail of COVID-19 kind of wreaks havoc on sectors like entertainment, airlines, you name it. That said, you don't want to be late to the party when that worm turns. So, maybe John first, but please everyone pipe in. What early signals are you looking for that it's safe to get back in the water and park some money and what some investors are calling these kinds of pro-vaccine companies, those that would really start revving back to life after the vaccine is out and getting distributed.

John: Well, it's such a critical question and such a hard one to answer. At various times the market has been excited by impressive and admittedly somewhat surprising sequential improvements in data points in terms of how our economy is progressing on reopening. But then you have to do a reality reset and look at where we were a year ago and you realize how deep of a valley we're still in. I mean, there's some real time indicators of sort of economic activity, such as airline travel, which may not be the best proxy, but it's clearly ... with many people locked down at home, airline travel is going to be one of the last things to come back, but still it's helpful to understand that airline travel is still down roughly 65% year over year here in the United States. Restaurant reservations, similarly, down 60 plus percent. Those are important indicators of just how steep of a hill we still have to climb to get back to anything resembling the run rate that we were at.

I think that were there to be a vaccine approval coming soon, there's going to be a short term trade around, sort of call it the reopening trade. So entertainment venues and restaurants and airlines and cruise lines and so forth. I think we'll see a short-term pop, but then I think quickly reality will set in, and even once the vaccines out there, it will take a while to get the vaccine distributed. I think it's going to take a long time to get sort of consumer confidence and resuming normal day-to-day activities the way we were doing pre-COVID. I think it's going to take us a long time to get there. So I think that the ... sort of call it the work from home trade.

I don't think that's an appropriate characterization. I almost think that the work from home trade is the new reality trade. I think the reality of people working remotely far more than they were before COVID using tools like video conferencing, doing healthcare visits via telehealth, working with their coworkers virtually rather than in-person. I think those are the new realities of the way many aspects of the world are going to continue long after we have a cure for this COVID crisis. So I don't think the move towards that cyclical reopening trade is something that is going to be that powerful or that sustained in my opinion.

Raphael: Dave, what do you think?

Dave: Yeah, it's interesting. We didn't discuss our fees before the call and John really talked about a lot of things that I feel similarly about, about this whole thing. I think that the announcement of a vaccine maybe attract traffic signals to a lot of people to tactically start buying a lot of these areas, indiscriminately and I also agree on ... my view is I'm less worried about being late to that party, because I do think that as John said, the practical realities and the difficulties of getting the vaccine distributed, seeing what the efficacy is on a broad population basis, all those things mean that we're not going to instantly return to normal. I think that what I worry about with some of the lingering structural challenges that John alluded to in certain sectors.

So when I look at some of the sectors that we highlighted as potential concerns, areas like airlines and commercial real estate, particularly related to office, those things are ... I agree with John. I think those are things that ... I think there's going to be ... and we've seen it in a lot of our companies and even our own company, this reevaluation of what remote work means as it relates to airlines. The ability to interact and communicate with clients remotely has improved a lot. It means probably a lot less business travel going forward. So I think there's going to be a sea change in how a lot of these businesses operated that directly will continue to impact some of these most effected sectors.

On the other hand, some areas like ... we're looking at areas like lodging and hotels, where you have some strong champions in those areas. They have the financial wherewithal and the capital to kind of not only withstand this downturn in traffic, but probably readjust their business models to the new reality on the other side. So I think fundamental research and paying close attention to some of these structural changes in some of these markets is going to be the key to avoiding big problems.

Raphael: Yeah. That's an interesting suite of options there presented. Dmitri, I'd ask you finally, looking at both sides of the ledger as you do in terms of multi-asset, what do you think is the most underappreciated risk, upside or downside, posed by the election that we're heading into here?

Dimitri: That's a tough one. I think one of the most under appreciated risk is the possibility of a very quick resolution on election night, either way for either party. I think the market is so primed for a messy resolution and potentially a pro-charte resolution that if that were not to be the case, and there would be a clear winner on election night, potentially with a wave either way either red or blue accompanying that, that will lead to a very quick and strong repricing or unpricing of the risk premium that's being [inaudible 00:43:37] in the asset classes. Very quickly the assets, different asset classes, will react to reflect the expected impact of the policies that you would assume each government will implement going forward. So that's probably somewhat under appreciated, the fact that they could be a quicker resolution, especially on the basis of polls not always being correct. It's possible that there's a lot of people that actually don't openly share their views during polling, and this might translate into a possible clearer outcome around election night.

Beyond that, I think the idea of having a COVID vaccine and potentially relying to go back to normal environment is an interesting one, and I think it would definitely be some kind of a pivot moment in the sense that, first of all, it's not going to happen ... it's going to be a process, right? So we won't know from day one that the vaccine is effective. There'll be a lot of question marks, but the fact that we are heading a direction that indicate that we can go back to more normal environments in terms of how economies perform in terms of consumption as well, that should support investors' risk appetite, and that will play out over multiple months or a fairly protracted amount of time.

What really worries me beyond just the risk related to the election is what's happened ... the implication from the very loose monetary policy and fiscal policy that have been pushed through recently this year, but also since the global financial crisis. So this market fragility that's created by all the policies is really what worries me in terms of multi-asset investing. We've seen a series of very sudden and outsized price moves in the range of markets. Very, very strong in short dislocations, whether it's serving bonds, currencies, commodities. Commodity prices even went negative earlier this year. So that tells me that even though these episodes have been short in duration and have been reversed so far, there's a risk for the markets to be more excitable and more fragile than what people believe. You can have this positive feedback loops whereby [inaudible 00:40:27] investors that might have mispriced some of the risk they actually exposed to have all to deliver at the same time, and that could create some situation of a very disorderly unwinding of positions.

So that brings us to this concept of having to understand the risks that you're exposed to, and that's really one of the things we try to do on a multi-asset side. One of the major risks is liquidity risk or illiquidity risk and understand whether the compensation you're getting for paying onto those trends is actually fair or not. That goes with similar sizing positions accordingly to try to be able to extend the initial market dislocations and potentially benefit from them subsequently. So I would stop here. If I knew exactly what the risks would be and how they would turn out, I think I'll be able to petition myself, but as we discussed at the onset of this podcast, binary events are very hard to incorporate an investment decision so we favor having a balanced approach and be reactive and position yourself after the event.

Raphael: Well, Dmitri, I can only hope that your most under appreciated risk, which is a quick, clean and decisive election result, occurs. I probably speak for all of us and every single one of our listeners. Well, John Porter, David Leduc, Dmitri Curtil, thank you for joining us on Mellon Double-Take podcast. Thank you everyone listening, and happy election.