Family offices

00;00;01;25 - 00;00;24;13

Chris Tatlock

Welcome everyone to the third episode of our audiocast series In the Family, where we bring together key voices shaping the landscape for family offices. I'm Chris Tatlock, a director on BlackRock's U.S. family office team within the Americas institutional business, and our host for today's episode. Joining me today is Catherine Kress, Head of Geopolitical Research and Strategy at BlackRock.

00;00;24;15 - 00;00;26;02

Chris Tatlock

Welcome, Catherine.

00;00;26;04 - 00;00;28;14

Catherine Kress

Thank you so much. I'm excited to speak with you.

00;00;28;16 - 00;00;34;21

Chris Tatlock

And we're excited to have you, Catherine.

00;00;34;23 - 00;00;56;15

Chris Tatlock

Today we're diving into an area that is top of mind for family offices, geopolitics, the U.S. election, and the impact of different election scenarios on compelling investment strategies. Perhaps we can start by setting the scene. The geopolitical situation globally remains extremely dynamic and delicate. How do you characterize and assess the overall landscape?

00;00;56;17 - 00;01;18;07

Catherine Kress

Thank you Chris. So let me just offer a few observations on the overall geopolitical landscape. First, I think it's fair to say that the geopolitical environment is unsettled. It's changed dramatically over the last few years. We've seen this series of cascading events, starting with the U.S. trade wars, extending to the Covid pandemic, Russia's invasion of Ukraine, the outbreak of war in the Middle East.

00;01;18;09 - 00;01;41;05

Catherine Kress

These events have all built on each other and now hang over the global economy and markets. Our view in the BlackRock Investment Institute is that geopolitics has become a persistent and structural market risk. Now, throughout history, the impact of geopolitics on markets has often been indirect, modest, short-lived. We did an analysis several years ago looking at risk events through history, and that's what we found.

00;01;41;08 - 00;02;03;14

Catherine Kress

But today's events are different in our view. They're driving long-term, structural change in the geopolitical order. So as we think about the characteristics of that order, we tend to put them in three buckets. The first is geopolitical and economic fragmentation, the second is volatility, and then the third is the rewiring of global supply chains. So I'll tick quickly through each.

00;02;03;16 - 00;02;23;12

Catherine Kress

So first on fragmentation, we're seeing the emergence and hardening of geopolitical and economic blocs in the world. So the U.S. and its allies in Europe and Asia are more unified than they've ever been. And countries like China, Russia, Iran, North Korea are cooperating more closely than they have in decades, with the shared goal of reducing U.S. power and influence.

00;02;23;14 - 00;02;43;14

Catherine Kress

But between these two geopolitical blocs, a really interesting group of countries has emerged. And we consider these the multi-aligned. These are the countries that have not taken sides in the contest between the U.S. and China. They haven't necessarily adopted the western position against Russia. The multi-aligned nations are very different from the non-aligned movement of the Cold War in that they're more than just statements and posturing.

00;02;43;16 - 00;03;07;14

Catherine Kress

They are major economies like India, Saudi Arabia, Turkey, Brazil. The economist calls them the Transactional-25, reflecting their more fluid, pragmatic approach to the world, which I think reflects their uncertainty around the future distribution of power. But as key sources of liquidity in the world, holders of supply chain inputs, natural resources, we see them as very well positioned to drive future global growth.

00;03;07;17 - 00;03;25;19

Catherine Kress

Now, the second characteristic of the landscape is volatility. There's been a range of measures coming out in the last year or so, showing that we're seeing the largest number of violent conflicts worldwide since World War II. And indeed, we have two hot wars underway in the Middle East and Ukraine. Flashpoints in the South China Sea and Taiwan are growing increasingly dangerous.

00;03;25;20 - 00;03;43;06

Catherine Kress

Now, if we think about the US election, these are conflicts that the next U.S. president will have to deal with. This heightened volatility is actually giving way to an increase in global defense spending. We saw global defense spending cross the $2 trillion threshold for the first time ever last year. So that's a trend we see is set to continue.

00;03;43;08 - 00;04;12;29

Catherine Kress

And then last on rewiring we're seeing an acceleration in the rewiring of globalization. This is a dynamic we've been hypothesizing for some time, specifically that concerns around national security, resilience would increasingly drive economic and business decision making, and that economic relationships would rewire along geopolitical lines. The data here increasingly supports our hypothesis and what it shows is that overall trade is not declining, but trade between geopolitical blocs is slowing and supply chains are getting longer.

00;04;13;01 - 00;04;36;12

Catherine Kress

One specific trend, I think is interesting is that we've seen direct trade and investment between the U.S. and China decline. And while it's declined directly, we're seeing it increasingly intermediated by third-party countries, which we call the connectors. These are places like Vietnam, Mexico, Indonesia. Each has become a top recipient of Chinese exports and FDI, and has increased their imports to the U.S. in parallel.

00;04;36;15 - 00;04;48;26

Catherine Kress

So these connector countries have brought resilience to global trade and activity. They've provided ballast against some of the instability we've seen. I'll leave you just with three questions that I'm thinking about as we consider the shape of globalization going forward.

00;04;48;29 - 00;05;01;27

Catherine Kress

One is what are the macro impacts of these supply chain shifts? Supply chains are getting longer and more complicated. Our view is that that's an inflationary dynamic and could be a drag on growth absent some dramatic productivity gains from AI.

00;05;02;00 - 00;05;24;25

Catherine Kress

Second, amid escalating geopolitical competition, how much longer can the connectors actually hold global trade together? How long will the U.S., for example, allow the connector countries to be connector countries? So we've seen a range of policy proposals in the U.S. and Washington and on the campaign trail looking to block Chinese manufacturers, for example, from evading tariffs by setting up manufacturing in third-party countries.

00;05;24;28 - 00;05;50;14

Catherine Kress

And then third, and finally, how has the lengthening of supply chains actually increased risks? If we look at the example of the explosion of pagers and walkie talkies by Hezbollah militants in Lebanon several weeks ago, we see how longer supply chains could give way to questions around penetration and weaponization. We think examples like that could accelerate the reshoring drive going forward, looking to reduce the distance between factories and markets.

00;05;50;16 - 00;05;57;14

Catherine Kress

So fragmentation, volatility and rewiring, those are some of the buckets that we think about as we characterize the landscape generally.

00;05;57;17 - 00;06;43;23

Chris Tatlock

Thanks Catherine That's a great overview. Family offices, which often have diversified portfolios across various asset classes, liquid and private markets, regions, sectors, all need to stay informed about these potential shifts to make strategic and tactical decisions to both preserve and grow their portfolios. Against this backdrop, we have the U.S. elections right around the corner. The U.S. election, in particular, is significant because the U.S. is a major global economic player and changes in U.S. policies can have far-reaching effects on global markets, trade agreements and international relations, making it crucial for family offices to closely monitor and prepare for these outcomes. What can you tell us about the state of the U.S. race and what we should be watching for at this moment?

00;06;43;25 - 00;07;16;15

Catherine Kress

So this is perhaps the number one question I'm getting from clients right now, but I'll just try to boil it down to a few observations. One is, despite the U.S. typically running the longest election cycle globally, we're now seeing the shortest race for president in history. President Biden withdrew from the race on July 21st, endorsed with Vice President Kamala Harris 20 minutes later, and by July 23rd, she had secured a majority of Democratic delegates, effectively clinching the nomination. Voting is now actually underway, with states sending out mail-in ballots and early voting starting in a number of places.

00;07;16;18 - 00;07;30;22

Catherine Kress

Two Biden's withdrawal effectively reset the race, and we see this in the polling. So Biden was trailing Trump by about three points before he left the race. Polling averages today show Harris with a lead of roughly one point. So we've seen a four point shift or so.

00;07;30;24 - 00;07;55;07

Catherine Kress

Three, this leaves us with a race that's exceedingly close. So most credible polls show a toss up. As I said, Harris has a very small advantage in the national polls within the margin of error. But in the battleground states, the seven states where the race will be decided, it's a dead heat. This is the first time in 60 years that a candidate hasn't held a five or more point margin for more than three weeks, so it's nearly impossible to predict the outcome.

00;07;55;10 - 00;08;19;02

Catherine Kress

Four, in Congress, we could very well see divided government. Republicans have a structural advantage in the Senate. In the House, Democrats have a slight advantage, but control will likely be contingent on who wins the presidency. And in all events, margins are likely to be tight. I think regardless of who wins, divided government, combined with a less friendly environment for regulation in Washington, would be a key constraint on either president's policy agenda.

00;08;19;05 - 00;08;34;19

Catherine Kress

Fifth, it is very unlikely we will know the outcome of the election on Election Day. If you look at state-by-state election mechanics, this could take days. A range of analysts are pointing to the fact that this might be the most litigated election in history. So we're preparing for a significant period of uncertainty.

00;08;34;21 - 00;09;23;02

Catherine Kress

And then last, when you think about the policy implications, the contrast between the two candidates couldn't be more stark. Across a range of issues, from taxes and trade, to immigration, foreign policy, climate, energy regulation, governance, there are substantial policy and political differences between a potential Trump administration and a potential Harris administration. One takeaway, from our analysis in the BlackRock Investment Institute, is that neither candidate is charting a course to reducing the fiscal deficit. So from an investment perspective, we see the range of factors at play reinforcing our view of persistent budget deficits, sticky inflation, higher-for-longer interest rates. The sectors likely to be impacted range from healthcare and technology to financials and energy. So it's going to be a consequential election, no doubt. But right now, too close to call.

00;09;23;05 - 00;09;50;17

Chris Tatlock

Lots at stake here. That's very interesting, Catherine. Family office investors are likely to be significantly impacted by these implications, as they can directly affect their investment strategies. We work with family offices to stress-test their portfolios and understand how different scenarios might affect their assets. And we can help guide them make adjustments, as needed, to preserve capital, minimize volatility, maximize returns, and meet overall risk and return objectives.

00;09;50;19 - 00;10;01;05

Chris Tatlock

We have a client Insight unit that offers dedicated portfolio analysis, including stress-testing and scenario analysis, to help family offices account for these tail risks across different market environments.

00;10;01;11 - 00;10;05;12

Catherine Kress

Yeah, the Client Insight Unit is a great resource. So highly recommend that.

00;10;05;14 - 00;10;17;18

Chris Tatlock

So you mentioned there are substantial policy differences between the two candidates. Could we double-click on that? What are some of the key policy areas you and your team are focused on, and how do you see the likely market impact?

00;10;17;21 - 00;10;29;26

Catherine Kress

Sure. So at BlackRock, we're focused on three broad buckets of policy implications when we think about investment implications, generally. The first is fiscal policy, the second is regulatory policy, and the third is trade policy.

00;10;29;29 - 00;11;04;25

Catherine Kress

So in the fiscal policy space, we think a Trump administration would prioritize extending the provisions of the 2017 Tax Cuts and Jobs Act and potentially implement individual and corporate tax cut as well. A Harris administration, by contrast, would seek a partial extension of the Tax Cuts and Jobs Act, but this would likely be narrower and offset by tax increases on corporations and high-income earners. One takeaway from our analysis, as I noted earlier, is that neither party is really focused on tackling the budget deficit. So we see these persistent deficits as reinforcing our views around inflation and interest rates going forward.

00;11;04;27 - 00;11;28;29

Catherine Kress

On the regulatory side, energy and technology will be in focus. So energy would be a key policy priority of either administration. One important note is that U.S. oil and gas production is already at record levels. So a Harris administration would likely see a continuation of the Biden administration's approach to energy policy, including support for clean energy. We would see a continued focus on implementing the Inflation Reduction Act.

00;11;29;02 - 00;11;57;24

Catherine Kress

A Trump administration would also support increased U.S. energy production, but look to scale back implementation of the Inflation Reduction Act. For a number of reasons, we think the act is unlikely to be repealed entirely, though. Regardless of the outcome, there is bipartisan agreement on the need for permitting reform to build energy infrastructure. But now, from an overall regulatory perspective, a Trump win could mean some deregulation, including the rolling back of regulation for banking in particular.

00;11;57;27 - 00;12;11;24

Catherine Kress

By contrast, a Harris win, we would see efforts to reshape the healthcare landscape through expanded Medicare drug price caps, Big Tech may still be a target for bipartisan antitrust measures. So that's going to stay in focus regardless of who wins.

00;12;11;27 - 00;12;49;28

Catherine Kress

Last, when it comes to trade policy, both candidates are likely to pursue additional export controls on national security grounds, especially in advanced technology. On tariffs, Harris is likely to maintain the status quo, with some potential targeted increases in tariffs against China. Trump's proposed 60% tariffs on China and 10 to 20% universal tariffs would be a significant escalation, though. I think in general, this posture of increased protectionism under either administration reinforces our views, at BlackRock, around economic and geopolitical fragmentation, which is one of the structural factors we see keeping inflation higher medium-term.

00;12;50;01 - 00;13;07;16

Chris Tatlock

Thank you. That's very insightful. One question is there a difference, in your opinion, between divided governments and Blue-or-Red sweeps from a policy point of view? Put differently, does a divided government limit policy change, or alternatively, which policy areas could a divided government focus on?

00;13;07;18 - 00;13;26;24

Catherine Kress

Sure. So right now, if you were to look at the polls, the two kind of most likely scenarios that we're looking at are a potential Red-sweep scenario or a divided government scenario under Harris. Prospects for divided government, as I said, is key to our analysis. So if we think about those two scenarios, the potential Red-sweep scenario would give way to more dramatic policy change.

00;13;26;27 - 00;13;53;14

Catherine Kress

Divided government under scenario would see more limited policy change given some of the constraints that divided government presents. And as I said, in a divided government scenario, presidents typically look to things like executive orders and regulation to implement their policy agenda. But right now, the environment in Washington is less friendly to regulation following a series of recent Supreme Court decisions. So there's a number of constraints on the President's ability to enact their agenda, regardless.

00;13;53;17 - 00;14;10;27

Catherine Kress

Fiscal policy is one of the areas where considerations around divided government is really key for investors. Control of Congress will ultimately dictate the size and scope of extensions to the Tax Cuts and Jobs Act, for example. And it will impact more generally the scale and shape of government spending going forward.

00;14;10;29 - 00;14;24;07

Chris Tatlock

What can we learn from history of the financial markets? Do political events matter taking a medium-term horizon, or do they just impact investor sentiment in the near-term and then the fundamental outlook reasserts itself?

00;14;24;09 - 00;14;56;16

Catherine Kress

So as I noted at the top, I think generally speaking, the impact of geopolitics tends to be indirect, modest, short-lived. When it comes to elections, specifically, we find that the uncertainty around the elections can, at times, be a drag on markets in the lead up to elections, but there's also some seasonality effects at play. Regardless of who wins, markets tend to go up after elections. I think that's in part because of the clarity that they provide. So when we talk to investors, we actually advise them to kind of see through market related volatility and stay invested for the long-term.

00;14;56;19 - 00;15;06;15

Chris Tatlock

Thank you so much, Catherine. This has been a great discussion. As we wrap up, do you have any final advice for family offices managing through these complex issues and an election year?

00;15;06;17 - 00;15;38;10

Catherine Kress

Sure. So my final advice for family offices would just be to stay proactive and adaptable. The political and economic landscape, as we've seen over past years, can change rapidly, but especially during an election year. It's important to stay informed, work closely with advisors, be prepared to adjust strategies as needed. So leveraging resources like BlackRock's insights and the Client Insight Unit can provide valuable guidance and support. By staying vigilant and flexible, family offices can navigate the complexities of this election year and position themselves for long-term success.

00;15;38;12 - 00;15;47;14

Chris Tatlock

Absolutely. Thank you, Catherine, and for sharing your insights on navigating the election landscape. It's been a very informative discussion and one that I know our listeners will enjoy.

00;15;47;17 - 00;15;50;03

Catherine Kress

Great. Thanks, Chris. Thanks for having me, this has been fun.

00;15;50;06 - 00;15;57;18

Chris Tatlock

And to our audience, thank you for listening. Stay tuned for more insightful discussions on our next episode of In the Family.

00;15;57;20 - 00;16;29;19

Chris Tatlock

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