Bond markets poised for gains if Biden re-elected: Morgan Stanley CIO

Morgan Stanley's chief investment officer, Michael Wilson, believes that if US President Joe Biden is re-elected, bond markets will benefit. Wilson said at the Reuters Global Markets Forum on Wednesday that Biden's administration will likely raise taxes to balance government expenditure, which might assist bond markets.

Wilson, on the other hand, stated that a victory for former President Donald Trump in the forthcoming November 5 election will boost economic development while posing issues for bonds.

Over the last 12 to 18 months, investors have gravitated into high-quality large-cap firms that have seen earnings revisions, resulting in alpha—a performance measure that indicates gains above a benchmark index. Wilson stressed, "The alpha is not so much at the sector level but at the stock level." He also mentioned that earnings revisions have created significant alpha potential for active investors, a trend that many institutional customers have noticed this year.

Wilson stressed the importance of stock selection for long-term investors, but macro-investors and risk-parity managers have deemphasised bonds in favour of commodities and currencies. "For stocks, it's all about earnings growth—what companies can grow earnings and cash flow faster than inflation, and more importantly, expectations," he stated.

According to LSEG IBES data, 788 of the 1,379 US businesses reporting earnings by June 7 had their projections revised upward, while 591 had them revised lower. Wilson stated that, despite stronger-than-expected first-quarter earnings growth, smaller market-cap companies have reported lower customer demand and slower loan growth.

Wilson highlighted the possible impact of the US election results on market sectors. He stated that a Biden victory would favour large-cap growth corporations, whereas a Trump government may boost the oil and banking sectors, as well as small-caps. Immigration policy under both governments would also be widely studied, with a Biden victory likely to be "more favourable for labour supply and inflation," while a Trump victory may reignite inflation fears by "shutting down borders."