In his latest note, Eoin Murray, Head of Investment at Hermes Investment Management, discusses how on November 6, the US takes to the polls to decide which party will control its House of Representatives and Senate:
In a bad-tempered mid-term race, echoing the current state of US (and global) politics, both major parties are going all out to gain or retain control of the two legislative chambers. As with every US election in history, who wins either or both houses will have an impact on financial markets.
Analysts at Bank of America Merrill Lynch have outlined their projections in a red, blue or split house scenario – and I am inclined to generally agree with them. Should the Democrats take full control of the House and Senate, expect a bearish dollar, US equity market and a flatter yield curve on the ten-year treasury. Should the two chambers be split, expect much of the same, but with a slightly brighter outlook. Should the Republicans retain control of both houses, however, expect a steeper yield curve, bullish dollar, but while equities will get a bit of a boost, it is unlikely to be a sustained stellar trajectory, BAML said.
But beyond the traditional political bickering and potential market impact, there is a lot going on in the run up to this mid-term election that is worth noting.
First, it will be interesting to see if the tech giants stay true to their word and help weed out potential meddlers.
In September, executives from Facebook and Twitter acknowledged in front of US lawmakers that their platforms had been used to influence political opinion by (often foreign) agents seeking to sway the 2016 presidential race. They stated that they would do better in the future and clean up their acts in time for the mid-term elections. Will they come good on this promise and clean up what is permitted to be posted online? Yes, it will take significant investment and corporate rearrangement to do so, but the potential consequence for failure is great, too.
Asian tech giants are lining up to take great swathes of international social media market share – the last thing Facebook, Google and Twitter need is punitive regulation restricting how they operate.
Investors, too, increasingly concerned about corporate governance and their personal impact on society, need to feel comfortable they are not part of an anti-democracy problem. The second, and potentially more impactful, point to be made about the US mid-terms is the number of female candidates.
More than 500 women have put themselves forward to run for the both houses, breaking records by some margin. Around a half of those who ran won their primary.
If that doesn’t sound noteworthy, consider that five senate races will be contested with only women as major party candidates. This has never happened before.
What has been the catalyst? I spoke with Jana Lynne Sanchez, Democratic candidate for Texas’ 6th Congressional district. She said that looking back, before the election of President Trump, “women were not as engaged politically as [we] would have liked”.
Look at what happened since: Exhibit A - the Women’s March in early 2017. Some estimates put more than 5 million people in the US having taken to the streets, equal to 1.6% of the population, not just protesting the president’s election, but advocating women’s (amongst others) rights.
Around the world women marched, too, as female political engagement has taken hold. The recent confirmation of Judge Brett Kavanaugh to the Supreme Court has likely only served to harden that interest. Political commentators believe that women now hold the key to the outcome of the elections – not just in the US, but globally.
When Mexico’s new congress assembles in December, women will make up roughly half of both the lower house and the Senate. Similarly, in France, the cabinet boasts a more even gender split, while in Iceland, much of the leadership both in government and the banking industry has transferred to women post the Global Financial Crisis.
What does this all mean for finance? Aside from any impact the outcome of the elections has on markets, there is a fundamental shift happening – one that our industry needs to note.
Compared to the recent shift seen in US politics, the demographic makeup of financial services looks archaic.
The latest paper by the Diversity Project and New Financial found (1) that just 22% of the UK asset management sector workforce is female. Just one in ten fund managers is a woman. An extensive study published by think tank New Financial in September examined the barriers to women taking up fund management roles. The study found these barriers to be entirely societal, rather than anything to do with capability (who knew?).
From a purely social standpoint – women make up 51% of the global population – this equation seems out of kilter, but, as investors, let’s look at it another way. What if improved gender diversity is one of the last free lunches of diversification? Research, both academic and commercial, shows gender-diverse companies perform better overall. A 2015 MSCI study (2) showed companies with at least three female board members had a superior ROE. The agency produced another study more recently showing an explicit link to economic growth and productivity. (3)
As an industry, we are continually searching for alpha, alternative beta or even just keeping pace with the market and throw millions, if not billions of dollars at it every year. Could it be the best and brightest minds in the industry have missed something that has been staring us in the face all along?
Jana Lynne Sanchez in Texas told me that the people who have the power must give others a chance. “It must come from the top,” she said. There is a movement for change within the investment industry, but I don’t think we should have to wait until there are marches on The City before it is acknowledged across the board.
If we truly believe in the theory of diversifying risk to maximise return, isn’t it about time we put it into action?