Thomas Mucha, geopolitical strategist for Wellington Management, offers an expert and timely opinion of what to look for in November, and how markets may react in various election scenarios. The veteran political and macro economic analyst tells host John Bryson which polls and battleground states he’s watching and how the COVID-19 pandemic may figure into the upcoming elections. Finally, Mucha provides insight into sectors that could be most affected by which party controls the White House and Congress, and why climate change and U.S.-China relations are among the top challenges he sees for the global economy and markets.
John Bryson:
Hello and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting at John Hancock Investment Management. As always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Today, we're going to cover a hot topic, the U.S. elections coming up this fall and we've got a great guest on today to help us talk about it. I'm joined today by Thomas Mucha of Wellington Management. Thomas is the geopolitical strategist for Wellington, where he conducts research on the macro and market implications of geopolitical risks with a particular focus on connecting these insights to actionable investment ideas. He's a frequent speaker at Wellington client events and institutional events worldwide. Prior to joining Wellington, Thomas had a very successful career in journalism as a writer, producer, and editor focused on global business, economics, and geopolitics in such publications as Global Post, CNN, Crain Chicago Business, and Time, and Incorporated Business 2.0 Magazine. Thomas, welcome to the show.
Thomas Mucha:
Hi, John. It's great to be back and I'm really looking forward to the conversation.
John Bryson: Excellent. Let's jump right in. Let's talk about what's going on right now and that's COVID, COVID-19. Tell me how that's impacting the upcoming election, current domestic politics, and really, global relationships.
Thomas Mucha:
Well, I think it's truly the number one issue, John, given what this crisis is doing to U.S. domestic politics and foreign policy as well to the global backdrop. And first and foremost, it's an historic health crisis. One that's resulted in the deaths so far of 170,000 Americans. That's about fifty-six 9/11s. So regardless of politics and all the noise surrounding the elections, that's a severe crisis by any measure and will likely produce structural changes in how we work, how we live, how we interact domestically and internationally.
Thomas Mucha:
Second, I think it's significantly damaged President Trump's number one argument for reelection, which is of course, the strong economy. So while he still holds relatively good marks here, the gap with Biden on the economy has narrowed dramatically in recent weeks and months. And they're now running about even on this issue. Third, John, and, and from my geopolitical perspective, this is the most important implication has been the impact on U.S.-China relations. By attempting to deflect blame onto China and making that a central theme of the campaign, the Trump administration is rapidly accelerating a downward shift in U.S.-China relations. Now this great power competition rooted in national security was already happening, but it's now in high gear with an uncertain outcome for U.S.-China relations, U.S. relations with its key allies, greater supply chain, and certainties across a number of key industries.
Thomas Mucha: I think we should expect more differentiated global macro and trade outlooks. And of course, a higher geopolitical risk across the board. Moreover, John, the way this crisis has been handled by governments worldwide with almost no coordination on either the economic impact or the hunt for a virus is what you would expect in a more multipolar world where multinational alliances mean less than stark national interest. And as a result, you see more conflict and less cooperation globally. So from my view, COVID-19, coming when it did, is accelerating the three main structural geopolitical themes that you and I have discussed in the past, a fracturing global order, a rising inequality driving further political dysfunction. And, longer term, a worsening outlook for a coordinated global response to the biggest long-term threat out there, which to my view, is climate change.
John Bryson: We're going to talk more about climate change and China because I think it's certainly issues we have to understand the impact of. So staying with the U.S. elections, can you weigh in on some of the voting patterns and polling patterns that you're seeing and what sort of polls are you looking at to base your analysis?
Thomas Mucha: Sure. So the voting patterns, as well as the polls, indicate an advantage to Biden and the Democrats overall. The patterns to me that are most important and really what we've seen the 2018 midterms include, most importantly, a worsening performance for Trump and the GOP in the key states that he eked out to win in 2016—Michigan, Wisconsin, Pennsylvania. But we're also seeing this now in Florida, Ohio, Arizona, North Carolina, even traditional Republican strongholds like Texas and Georgia. And the changes here I think have been fairly consistent and really structural in each of these states. Trump has lost a lot of support in the suburbs, with women in particular. Now, while we've also seen large voting increases since 2018 in the 18- to 40-year-old demographic, which tends to be strongly democratic. Most importantly, recently we've detected a big shift in support of older Americans away from Trump who really won this group big in 2016 and over to Biden.
Thomas Mucha: And if this holds up, I think that's likely to be a major factor in the states that matter, the swing states, which have a larger proportion of older Americans, places like Florida, Arizona, and across the Midwest. As for the polls, I think it's important to note that polls are snapshots in time. They're not predictions of what's going to happen on November 3. We're still about 75 days out here and I think a lot is going to happen in this unique political climate we're all experiencing. So while Biden is the clear favorite with an increasing probability of a Democratic sweep of Congress, our conviction levels here shouldn't be too high.
Thomas Mucha: Now I tend to focus on the polls in the swing states, which matter more than the national averages given the electoral college system that we have. And as for those sources, those public sources, I follow more reputable polling sites like FiveThirtyEight as well as other professional pollsters, such as Charlie Cook, who has a long track record of success over many decades. But I'm also in periodic contact with members of both the Biden and Trump campaign teams. So I try to glean as much information as I can from their own internal polling data as well, which tends to be more granular and more directly tied to their specific campaign objective. So it's a pretty broad mosaic that I'm paying attention to here.
John Bryson:
Okay. Really interesting. So if I were to push you to make a prediction, what would you see now as the most likely outcome? Is it a Biden presidency with a Democratic sweep? Like you said, it was where we were trending, or is it some other outcome?
Thomas Mucha:
Yeah, I think a Biden win with a Democratic sweep of Congress is probably the most likely outcome right now, given the dynamics of the race. Second, would be a Biden win with a split Congress with the GOP maintaining slim control of the Senate. Now either one of these congressional outcomes matters greatly to the direction of policy and therefore it's what we care about here, which are the market implications. And in general, I think progressives should temper their expectations about what lies ahead, even in a blue wave election. I think significant structural change will be very hard to come by given that the Democratic Senate margins will likely be slim and that there are plenty of moderate Democrats in both the House and Senate. So I'd expect more gradual measures and a Biden administration focused largely on economic revitalization and COVID-19 prevention.
Thomas Mucha:
Other policy issues I'm looking at, infrastructure now with a big emphasis on renewable energy, I think is the likely legislative emphasis right out of the gate as will other climate-related and carbon-reducing measures that can be done by executive order. Things like a U.S. return to the Paris Accord, a ban on oil drilling on federal lands and in the Arctic. And in general, more regulation of the oil and gas sectors in the U.S. with a real focus on environmental and health impacts, including clean air, clean water, and other quality of life measures. So there's a wide variety of outcomes here, but it really is going to come down to those margins in the Senate.
John Bryson:
So you mentioned kind of the impact on environmental policies and if Biden wins addressing any COVID problems, as soon as possible. What other fiscal, regulatory, and global trade policy differences do you see between Trump and Biden that we should be considering?
Thomas Mucha:
It really matters who wins this election. It is a cliché, John, that this is the most important election every four years. But from a policy direction, I think it really does matter. And in addition to infrastructure and climate in a Biden administration, I think healthcare is likely to be a priority and specifically policy matters related to COVID resiliency, such as more fiscal spending for hospitals, schools, and other frontline workers. So I don't expect a major overhaul of the U.S. healthcare system under Biden, who is likely to take a more incremental approach. Tax policy, on the other hand, will certainly change. I think we should expect higher corporate rates and higher personal rates for upper income earners. I think that's the direction, but again, all of this will be very much dependent on the makeup of Congress. I think another difference here will be a greater focus on police reform and other social justice issues, probably run from the office of VP Kamala Harris, who has a background in these issues, given her experiences in California as state attorney general prior to joining the Senate.
Thomas Mucha:
And as for trade, John, I think, we shouldn't expect a major U-turn from Trump in many ways in a Biden administration. Yes, there will be more coordination with allies on China in particular. Yes, there's a potential return to the transpacific partnership. And in general, I'm expecting a more measured use of specific tariffs and trade sanctions, but I do think most people underestimate how pro-union and pro-U.S. worker Biden has been over the years. I think that will continue. And that will be a focus particularly in the industrial Midwest states that are critical to November's election outcomes. So I don't think we should expect to return to full free trade regardless of who wins in November. And we should therefore expect a continuing focus on what future trade deals mean from the U.S. worker perspective.
John Bryson:
So kind of continuing on this theme of differences, one of the things we've seen recently is U.S. technology leaders have really come under pressure and scrutiny from Congress. How does that play out under the different administrations? How will this impact the power struggle, if you will, that we have with technology, with over technology with China?
Thomas Mucha:
Yeah, that's a great question. I think we'll certainly see more scrutiny from either side, frankly. The Biden team has indicated a strong preference for more regulation of tech, greater antitrust scrutiny, more oversight of privacy issues and personal data, as well as more questioning about what goes into social media and other algorithms, given the increasing importance and frankly, the widening prominence of artificial intelligence. Biden, for his part, was fairly tough on the tech industry during his time as VP. Harris, meanwhile, has close personal and a lot of fundraising relationships in Silicon Valley given her California background. But more importantly, in my view, is, and you indicated this, the role tech is likely to play in the emerging great power competition with China. Every new advancement in technology now has a dual-use civilian and military application. I think that will be brought to bear as the U.S. and China vie for both military and economic dominance in coming years.
Thomas Mucha:
So semiconductors, because they're in every defense application you can think of, are at the heart of this, but this extends to next gen communications like 5G, command and control systems, militarization of space applications ranging from satellite communications to hypersonic weapons, to other advanced missile systems and on and on—to robotics, aerospace, autonomous vehicles, and especially artificial intelligence as applied to national security and beyond that, the many important military applications of quantum computing. So I think, John, as a result of all of this, the tech sector more broadly is being seen as a strategic industry in this great power conflict. And so I think that piece of it is important, an important framework for how policymakers will likely view tech and in the long run, it may temper some. Some, but not all of these regulatory concerns.
John Bryson:
So you think both sides of the aisle recognize the importance of tech. There may be more regulation under Biden, but they both recognize the importance of it and will probably tread lightly. Is that a fair way to think of it?
Thomas Mucha:
National security is increasingly a bipartisan issue, particularly when it comes to China, and tech is at the center of that.
John Bryson:
Okay. Great way to summarize it. So I want to go a little bit further on China. Share your general thoughts overall on our relationship with China. And is this challenged relationship, I'll call it, is it good for markets, bad for markets, or are we indifferent?
Thomas Mucha:
Sure. So, you and I have spoken about this before, but I think from a geopolitical perspective, this is the most important relationship in the world. It has been, and it will be for decades. And the point I'd like to get across here is that there's been a fundamental shift in the way official Washington now views China. The driving factor between the U.S. and China is today, great power competition rooted in these national security issues. I think that's more important than all other factors. And so this shift in emphasis away from economics and trade and towards national security, that's supported by both political parties. It's deepening across the U.S. government beyond the Pentagon and the CIA. And it's now been institutionalized in the new U.S. national security strategy that highlights great power competition as the biggest current strategic threat to the U.S. with, of course, China at the top of that list.
Thomas Mucha:
Now clearly this shift in defense policy started before the Trump administration. It clearly accelerated during the trade war and is really rapidly worsened in recent months as a result of these domestic political pressures in the U.S., and as I said, that the Trump campaign is working hard to blame China for the COVID-19 crisis. So, I expect the U.S.-China relationship to continue to fracture as we move towards November. And I also expect these geopolitical and policy frictions to continue, regardless of what happens in November. And this is mirrored by the legislative backdrop as well. There are some 270 bills on Capitol Hill right now that target China in one form or another. So that backdrop now looks a lot like the national security backdrop in the U.S. So again, this is bipartisan, this is structural. This is likely to be long term.
Thomas Mucha:
And at the geopolitical level, I think we should also expect continuing friction in the U.S.-China relationship broadly. And that to me is a negative for a geopolitical risk globally as these two powers fail to coordinate or cooperate on a variety of issues. The most immediate flash points that come up most in my discussions in DC continue to be the South and East China Seas, North Korea, Hong Kong, and especially Taiwan, which remains the deepest concern for U.S. military planners in Washington. I think the most likely risk right now is a military accident in one of these hotspots that spirals out of control, given the poor bilateral relationship, the political climates in both countries, a rising nationalism as a response to the COVID crisis. And probably, most important, John, the fact that almost all strategic contact between Washington and Beijing is essentially nonexistent at the moment. So while I'm not predicting war, this is a very precarious moment for the world's most important bilateral relationship. And I think it deserves our full attention.
John Bryson:
Clearly. And if you think this through, one last question I want to ask you on China, do you feel that Trump and Biden will approach it differently? And what will be one approach versus the other?
Thomas Mucha:
Yeah. So in sum, under let's view the Biden scenario for a second. In sum, there, I expect a more professional and frankly, more predictable management of U.S.-China relations as the Biden team will prioritize that diplomacy over the widespread use of tariffs. In particular, they will work more closely with allies. They will return to the WTO and other economic institutions, including a potential return to the Trans-Pacific partnership. Although one, there then emphasizes not so much trade, but competition with China. And this means there'll be a huge focus at the State Department. There'll be a big attempt to lure back many of the professional diplomats who left or who were driven out by the Trump administration. So I think the U.S.-China relationship under Biden likely gets marginally better. And we step back from the brink a little bit, but in no way, does that mean the frictions end. These great power competition issues are likely to be with us for years, regardless of who's sitting in the White House. They are structural, they are long term, they are real.
Thomas Mucha:
And more specifically, the Biden team is very likely to emphasize human rights and democracy as bigger parts of U.S. foreign policy, which makes Hong Kong, Xinjiang and the weaker policy, and especially Taiwan, continuing hotspots and real points of friction in the U.S.-China relationship. Now, if we do get Trump 2.0, I won't spend too much time on this because I think we've already seen what he wants to accomplish. I think we should expect more friction with China, particularly if the bash China's strategy works to get him reelected, I would expect continuing pressure on U.S. alliances, poor diplomatic relationships in Europe and elsewhere, continuing deterioration of U.S. global influence, and even a higher degree of political polarization and dysfunction inside the U.S. And of course, no movement on climate change, which to me is the biggest long-term threat to both a national security and the U.S. economy. And John, it's one that the Pentagon and the CIA, climate change has put at the top of their worry list, really, for a long time.
John Bryson:
Let's talk about that. You're passionate about climate change. You've written about this quite a bit. It's not the topic of the day, if you will. It has been in the recent past, and it sounds like you think it will be again in the future. How does policy vary under Biden versus Trump, and how do you view climate change from an investment perspective and how should people prepare for a longer-term impact?
Thomas Mucha:
Sure. So I think the approach to climate change will be very different in those two scenarios. I think that the Biden team will make climate change a real priority. Again, through that infrastructure lens at first. That will be the best way to get the economy kick-started again, but a real emphasis on renewable energy in particular. So I think that'll be a priority. It's the priority of the Democrats across the board. There are already several bills written in Congress just waiting for a Democratic signature to happen. So I think that's going to be a real priority in the Biden administration. Again, Trump, I don't think that'll be a priority at all.
Thomas Mucha:
As from the investment perspective, John, to me, this is the most important long-term consideration for markets. You may know that Wellington has a close and proprietary research relationship with the Woods Hole Research Center, recently named the Woodwell Center for Climate Change. This group is consistently rated as the top climate science research team in the world. It's led by former White House climate advisor Phil Duffy. They've got dozens of the world's top climate scientists on staff. What this means from my perspective is that, we get suspended an hour a week with these folks and we get to incorporate their best thinking, their latest science into our various investment strategies. We do this systematically and without politics and by specific climate variables.
Thomas Mucha:
So we look at temperature, droughts, wildfires, sea level rise, hurricanes, water scarcity, and the like, and it's a particular interest to my geopolitical risk analysis. As I said, the Pentagon and CIA have really made this a long-term issue, given the disruptions that are likely to intensify as a result of a warming planet. But from a specific investment perspective, what I've taken away from this is very simple. The climate is changing rapidly, and even if we took global carbon emissions to zero tomorrow, we would still see decades of warming based on the physics of climate science and the lingering effects of so much CO2 in the atmosphere. So that leads me to the idea of adaptation. I think humans will do whatever it takes to cope with these more difficult living conditions, including adapting to warmer temperatures, more storms, more coastal and inland flooding, droughts, and everything else that the science is pointing to. And again, this is global. It's not just one country, this is going to happen everywhere.
Thomas Mucha:
So one of the strategies that I've been developing is tied directly to this idea. In sum, we've identified global companies that produce 50% of their revenues from an adaptation to one of these specific climate variables. So air conditioning, cooling, and others for rising temperatures, for example, dredging and engineering, water management and irrigation technologies for coastal flooding and water scarcity, specific biotech companies, and others that we'll see demand increases due to health-related climate impacts and so on.
Thomas Mucha:
There's a lot of ways to view this, but I found that this adaptation approach is a great way to both conceptualize the practical investment implications of this long-term trend, but more importantly, to apply a degree of investment rigor to the approach and critically tie it to the actual science. So it may not be the focus, the immediate focus right now, but I think over the long range on this is one of the biggest factors that we as investors really need to get a handle on.
John Bryson:
Okay. So if I would ask you to tie together what I would call the short-term market implications of changing the guard, if it goes over to Biden, the medium-term challenges that will continue with China and the long-term challenges of the environmental issues, if we don't address them. How would you tell people to be positioning their portfolios like a global portfolio? What would your thoughts be?
Thomas Mucha:
Sure. So in the short term, you want to take a much more sector-centric approach to sectors that might come under pressure, given a changing of the guard, as you put it. So more pressure on traditional energy companies, for example. That's one thing I would look at. Over the medium term and over the long term, I really think focusing on these big structural changes in geopolitics is the way to think about this, and that really leads you to more thematic investing strategies. And so again, one of the things that I try to do is look at these long-term structural changes in the global order and what are the behavioral changes that this is producing. And one example of that, as the U.S.-China relationship continues to evolve much more focused, much more investment focus on changes in defense spending, and in particular, these dual use civilian military applications.
Thomas Mucha:
I think there'll be the creation of all sorts of national champions across these industries in a variety of countries. And I think it's important to note that traditionally a great power competition has actually been a market positive. I know it sounds counterintuitive, but it does create more favorable fiscal and monetary backdrops for the most part. And it's the national champions aspect of it. We'll create all sorts of investment opportunities globally. And then over the long run again, I think it's really thinking about climate change and really thinking through what are the wide-ranging implications here on a regional basis, on a country basis, on an asset class basis, and on a specific company basis. So, we have a lot of work ahead, but, but I really strongly encourage investors to think about these long-term structural changes. That's far more important than individuals in politics.
John Bryson:
That's great. I love your analogy around national champions. It's the struggle period that we have to get through if we want to get better—and the best do get better. Thomas, it's always great to talk with you. It's clear to me, you and the folks at Wellington are thinking two, three, four steps ahead. And I love that. Thanks so much for being on the show. I very much appreciate it.
Thomas Mucha:
John, it was my pleasure and best of luck to you and everyone else out there.
John Bryson:
All right. Folks, thanks for listening in. If you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes or visit our website, jhinvestments.com to read our viewpoint on macro trends, portfolio construction techniques, business-building ideas, and much, much more. Thanks so much for listening to the show.
Disclosure:
This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA,SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.