Welcome, everyone and thank you for joining us for today's webcast. I'm Steven Olson from Institutional Investor and this is the fourth episode in our webinar series with RBC Global Asset Management: Managing multi-tiered risks - Seeking resilience in uncertain times. Today, we will be focusing specifically on Managing Election Year Jitters. We're looking forward to an engaging discussion with our moderator, Cynthia Steer, who is Senior Advisor at Institutional Investor, and our featured speakers, Charles Whinery and Graham Stock, both of whom are from the BlueBay fixed income team within RBC Global Asset Management. Charles is BlueBay Portfolio Manager and Graham is BlueBay Senior Sovereign Strategist.

50% of the world is voting this year or has voted. Elections do matter. We as investors have to mitigate risk and we are looking at a lack of correlation for bond and equity markets. Graham, I'm going to start with you. Let's start outside the US. Can you set the stage for us? To recap the elections globally so far and also have us think about how the markets reacted to it so far?

Thank you, Cynthia. Absolutely. As you say, it's a critical year for elections. Over 1.5 billion people will vote in elections this year in more than fifty countries. We've had a number of those already. Generally speaking though, it's been a question of continuity. We haven't seen big shifts in those elections. The market reaction has tended to be limited to that country's own markets depending on whether the perception is market friendly or adverse. We haven't really seen any contagion from one election to other countries. You can see that in the performance of assets over the course of this year. Emerging market bond index is up 7% where we've seen episodes of volatility. It hasn't really been tied to individual elections. EM equities are up 4 to 6% over the course of the year. You're lagging in the US, of course, but putting in a decent performance.

Three of the key elections that we've had so far did have some nuances that were interesting to examine. In India, for example, Narendra Modi was expected to emerge with his power consolidated with an increased majority and in fact, won with a smaller majority. That has implications for his next term. In South Africa, the ANC posted its lowest results since the end of apartheid and was forced into a coalition with other partners, which at the time again led to some volatility and nervousness around the direction in which they would go. Then in the middle of the year, Mexico had an election that resulted in the election of the first female president there with an increased majority. That Morena party gave a resounding vote of confidence in Amlo's first term, returned Morena with large majorities. We're starting to see the implications of that now as they explore constitutional amendments that weren't possible under the previous administration.

Elections do matter, but so far I would say we haven't had any that have been ground shaking in terms of their impacts. Of course, the big one may well still be to come.

I agree, but I want to focus a little bit. You're considered an expert in Latin America. Anything specifically outside of Mexico that is either election year or something our investors should know about?

There's always political risk in Latin America and sometimes it's around election time. Sometimes it's just a change in social and economic conditions that is leading to volatility that could result from changes in government. One of the elections that has happened this year was in Venezuela where the government chose not to respect the result. It's widely accepted as a result of the vote count that the opposition was able to publish that the opposition won that election. And yet Nicolas Maduro has remained in power and is denying that outcome. There are episodes that matter and others that maybe don't matter so much. Nayib Bukele was reelected in El Salvador with a huge majority at the end of last year. We had Javier Milei elected in Argentina, which was seismic for the country and is leading to a big step change in the way that economic policy is conducted in that country. But they're by no means out of the woods. He still needs to maintain that popularity. In fact, next year's midterm elections may well be even important. There are always nuances to both the election outcomes and the policy changes that happen in between election cycles.

Thank you very much for this because many of us don't know that much about Latin America. Last night in the debate, immigration was a very big topic. And a lot of this is fed by some of the political unrest and economic unrest of many of these smaller countries.

Hey, Charlie, let's, switch over to you. Rather than forecasting the election, let's just talk about the environment in the states, just like Graham, and how have the markets looked at this so far?

You're seeing an equity reaction to the debate today and markets have been pretty orderly. I think the way that we're thinking about it is it's a 50/50 nation for the most part. That's reflected in the polls this morning. The betting markets have a higher surge following last night's debate performance. But at the end of the day, it is still very divided and you're seeing that not just presidentially, but in the Senate and in the House races as well.

A small number, a small shift in one direction or the other in any of those swing states or any of those races could have pretty profound implications on who ends up in control. I think about it in buckets, sort of generically a Democrat sweep, a Republican sweep, or divided. I think a divided Congress is still the most likely outcome. I think the Senate almost at this point still looks like it's going to go to the Republicans- I know I said I wasn't going to forecast but can't help myself a little bit- as West Virginia is going to flip.

Montana has been consistently having Sheehy ahead. We don't know the impact of RFK Jr. and Michigan and Wisconsin, but those might be in play, Ohio as well. So we'll see, but for now anyway, it still seems like the most probable result is the Senate swings to the Republicans. On the House side, I think that's really going to follow the top of the ticket. If you have Harris winning, I think she'll drag enough votes along. I think it was Cook Political calling twenty four House races as a toss up for the Dems to take the House back. They need fifteen of those to go their way and with the top of the ticket in their hands, I think that's likely. Similarly, if Trump pulls out a Republican win, maybe he keeps the House, in which case you do have a Republican sweep. But it's coin toss at this point in all those races.

I've seen two quotes right now, one that we are perfectly equally divided, and the other quote which is a more historic one, is that the more that binds us than separates us.

Let's flip over to economic things. We saw a lower than expected print on inflation today. And I'd like to start, Graham, with you talking about inflation and interest rates on the global side, then come back to you, Charlie and talk about that. Graham, one of the things that has always- I spent a lot of time in the emerging markets- is that no one-size-fits-all. Can you walk us through some of the trends broadly and give a couple of examples of countries where we're likely to see lower interest rates, lower inflation versus higher inflation over time? Because that certainly is a concern for us. There was a fair amount of conversation about the import of Chinese inflation through tariffs into the US.

Yeah, absolutely. It is true that no one-size-fits-all, but I think also it's true that at the moment we're part of a cycle that is still a process of normalization post COVID and post the outbreak of the Russia Ukraine conflict. Inflation spiked higher partly as the result of the stimulus that was deployed to counteract the effect of lockdowns and disruption of supply chains from those two events. We've been in the process of normalization ever since, which has happened at different speeds in different countries depending on the degree of stimulus, the tightness of policy, the reaction function of central banks.

But we're now close to the stage where inflation has normalized again. So we'll start to see more differentiation between countries depending more on those domestic factors. But there are still a number of central banks that have plenty of room still to cut, Colombia, Mexico, ultimately Brazil, although in the near term Brazil is more likely to be hiking than cutting. Inflation has come down a lot in those countries. They kept policy very restrictive to squeeze the last of those second round effects out. Central banks all over the world are worried still about inflation in core services, which has been sticky.

Labor markets are still quite tight in a number of places. I think over the next year, inflation will have normalized completely. Then we'll be able to start to differentiate a bit more between, the winners and the losers, the leaders and the laggards, in that respect.

The tariff effect is critical. One of the key outcomes from the US election will be how much damage is done on the trade front, how clearly a Democrat win would presumably mean continuity with the current stance. But we've been warned by Donald Trump that he intends to impose swinging tariffs, not just on China, although they'll be highest on Chinese imports, but potentially other countries as well. That disruption to trade and the price effect in the US would spill over into other countries as well, so that's definitely a concern.

Just to follow up on that point, that's probably our biggest concern right now as it relates to US fixed income markets. Trump has said he wants a 10% tariff on everybody. It's 60% on China. You never know with him if it's bluster or a strategy. But were that to happen, we worry that's inflationary, that puts the Fed back on hold and it creates a weak setup for fixed income. Now equity markets might respond positively in the short term, but equally we’d be concerned longer term in that regard as well. In terms of results for the market, to Graham's point, we view Harris as continuity and maybe some things change around the margin, but largely with a divided Congress, she'll be a little bit handcuffed, whereas tariffs Trump can just do unilaterally and the ability to slow him down is difficult. Legislatively you could pass a law and overturn any tariffs that he had, but presumably you'd need a sixty vote majority in the Senate to prevent him from just vetoing it, which would be a heavy lift in any scenario.

One might ask, why are we spending so much time on inflation? Because to me, in 2025, many investors like myself who sit on investment committees are going to be relooking at asset allocation. As we know, higher inflation, higher interest rates lead to very different expectations in terms of returns for various asset classes. And one of the main questions in the equity market is, do I put all my eggs in the domestic equity bucket in the US or do I diversify around the states? I don't know that we're extraordinarily clear about how we're going to go forward on that. Charlie, I'm going to press you a little bit on this. If you were to look twelve months forward, Graham talks about the normalization of inflation, which means that interest rates probably will be fairly stable. Do you think we will go back down? Because the question of the day, and I sometimes find it generational, is whether we go back down to a 1.5% of inflation or we stay more at the 2.5 to 3.5%. Any thoughts around that?

I would think it's more likely the latter, 2, 2.5, 3, somewhere in there. I think the Fed is probably of the mindset that they'll stop a little early at this point and maybe they don't need to nail that target precisely. With the outlook in either, regardless of election results, it's going to be plenty of government spending. I think it'll be difficult to drive that inflation rate down to 1.5% percent or below. Either way, there's going to be lots of spending, but I think tariffs are the bigger risk than just pure government budgets in the US.

I don't want to corner you, Graham and Charlie. If you put a finger in the air, does that add 50 bps on inflation to a domestic consumer in the states and to a global? Is it different? I'll start with you, Graham. Is it different or the same if the US starts to put tariffs? I actually don't know the answer.

I think it's different because it depends whether the price differential is big enough for those goods to be diverted elsewhere, which could put downward pressure on prices in the countries they end up going to. Or is the new marginal price, the price that's paid in the US, and you see prices driven up elsewhere, or shortages as production is just curtailed in response.

The big challenge, clearly there's a short term challenge with inflation and impact there. But the bigger challenge is the disruption to global trade and the tit for tat response, because it's not going to be a one off. China's not going to sit back and say we accept that, our prices should always have been higher. There'll be responses, there'll be specific sectors targeted and that's less predictable.

There's been quite a lot of talk over the last few years about global trade becoming less robust. In fact, it's stagnated. It hasn't fallen back. The big growth in trade that we saw with the end of the Cold War and the formation of the WTO, that was dramatic. It lifted lots of countries, particularly China, huge reductions in the extent of poverty in China, but a lot of countries benefited, and we haven't gone into reverse, but with a really mercantilist, nativist approach in the US, I do worry that we could. That's what worries me more than the short term price impact for shoppers at Walmart.

On the other hand, that leads to opportunities in the market. Charlie, any comments?

Quickly I was just going to comment on that last point which is, you don't know how serious it is, but Trump has been paying lip service to a 15% corporate tax for US produced or companies that manufacture over here. It's just a continuation of that trend. It's the unintended consequence of that that makes it so tricky to predict the market impact.

We are moving and have moved from a unipolar world to a multipolar world. So with that, are there any lessons from previous election cycles that we can apply as investors to mitigate risks and capitalize on market opportunities? I'm going to start with you, Graham, and then go to Charlie.

I think there are, and it’s very much country by country. The important thing as sovereign analysts is to understand that the structural factors driving the electorate's choices. What is it that's likely to be a key factor in the election, is there frustration with the incumbents, which might be their fault. It might be completely an unfortunate side effective COVID, for example, the lockdowns that were imposed to protect people were not popular and it was difficult for incumbents to win reelection in the wake of that pandemic. The cost of living crisis that hasn't been caused by governments, unless you include the response to that pandemic and again, the Russia Ukraine conflict, but it's hurt people's pockets. It's hard for governments to get reelected when the electorate is focused on that.

I think looking at those structural drivers helps you to gauge the risks around election outcomes and therefore, hedge against worst case outcomes or position for the most likely outcome. It's important also to look down ballots as well. It's not just about the government or the president that's elected. Will there be structural changes in the balance of power?

In Mexico, for example, again, that 2/3 majority that Morena has in Congress is a very important change. It gives them the power to change things in the Constitution, which was not within their reach over the last six years. We're seeing that already with judicial reform that was passed overnight in the Senate. We could see it in the coming days with other constitutional amendments that could add further rigidity to the budget. So absolutely, but it's a case by case situation.

So not necessarily any takeaways except that every cycle and every time we look at this, it's I don't know or it all depends, right?

Well, there are no shortcuts. You need to get into the weeds, understand what the drivers are, spend time talking to not just the government but the opposition as well, talking to your political actors across the spectrum to understand what the likely outcomes are and what the consequences of those outcomes might be.

I think it's great for active management, both on the fixed income and equity side, because everything is different. You can't lump things together. And as cycles change, for instance, I used to love Tunisia and Egypt for EMD. I used to adore Brazil. For those of you who don't know, in the GFC, Brazil had some of the most liquid bonds relative to our own treasuries during parts of the GFC, so it all depends. Charlie, any insight on previous cycles that would inform us right now?

The thing on everybody's mind is regardless of what happens in this election, there's going to be roughly half the country that's very disappointed with the result. To our discussion a little earlier about institutions, I think the important thing to do is take a step back, whichever side of the aisle you find yourself relating to the most, take a step back and appreciate that the institutions in the US are pretty strong.

Hey, Charlie, let's talk about credit. We’ve talked about interest rates, we've talked about inflation. What about credit? We really haven't had a downturn in credit quality for a very long time in terms of defaults. Do you think during this volatile period, is it just a liquidity issue or could we be tipping over into more of a credit? We've got very tight credit spreads right now.

We do have pretty tight spreads at the moment, but corporate balance sheets are in pretty good shape. If you want to pick on the part of the market that would be most susceptible- high yield- interest coverage rates, they've peaked and come down some, largely associated with rising interest costs with floating rate debt that we've seen, but coverage levels are very good right now.

The default cycle looks pretty benign and the hidden part, maybe with the advent and growth of private credit, maybe there's something there that's hidden from the public views. But equally they're pretty well positioned to help companies get through a rough patch. I really don't see a large increase in the default cycle in the near term. The type of ReFi activity we've seen has been to take out front end maturities. There's no maturity wall. At the aggregate the market is very healthy in that regard.

With many countries facing rising debt levels, Graham, do you think sovereign credit ratings are going to be affected? And number two, what about our sovereign credit rating, Charlie? Do you think any challenges to that?

I don't think there'll be immediate read through to sovereign ratings from any election. It's a function of what policies are adopted afterwards. Rating agencies will never change the rating because the nameplate on the presidential palace has changed.

They'll assess the policies, look at the trends, and may well respond if policy deteriorates. That's what they should do. But the election per se is not the driver. Sometimes governments get elected on promises of doing all sorts of things. But when they open the books and realize that actually there are costs to all these things that they would like to do, policy moderates. The market does have a disciplining effect in a number of cases. So no, the election itself is not a risk for credit ratings, but if policy deteriorates, then for sure, yes.

Look, rarely are things as bad as they might be forecast to be, but what I would say is there are very real tail risks here and I don't want to downplay that. To be a broken record, the biggest concern that we have right now in terms of US fixed income is if Trump is elected and gets very aggressive with tariffs and starts a trade war and the implications of that, which we don't view favorably for fixed income markets.

The same applies to emerging markets fixed income broadly. Of course, tariffs would have particular implications for China, potentially for Mexico if they're broad based, and that's something we need to watch out for. But if policy doesn't change dramatically, then we're set up for a pretty good story. The Fed is easing, looks like they should be able to engineer a soft landing. The US economy is doing pretty well going into that cycle. EM growth is performing well. Sure China's slowed a bit, but will still be an important driver of growth. So all else equal, the outlook is reasonably benign, but as Charlie said, we need to focus on the tail risks and think about what the implications would be if they play out.

Thank you, Graham. Thank you, Charlie. I'm going to hand it over to Steve.

Well, it's my job to thank you, Cynthia, as well as Graham and Charlie. We really appreciate your input. We appreciate our attendees’ time and we look forward to seeing you on the next RBC Global Asset Management webcast.