With seven trading days to go before the US election, what specific impact will the final election result have on the market?

This week, Jay Pelosky, chief information officer of TPW Investment and former strategist and managing director of Morgan Stanley, said in an interview with Red Weekly that if Biden is elected and the Democratic Party has a majority in both houses of Congress, it will bring more positive fiscal stimulus. "I personally look forward to the Democratic Party winning."

In terms of investment opportunities, Pelosky said, "I think a healthy decline will lead to further gains, and we are at the beginning of a multi-year bull market." But in terms of specific investment opportunities, we have shifted our 'technology value barbell' from focusing on technology to focusing on value stocks. In the future, financial stocks, industrial stocks and materials stocks will show eye-catching performance. "

A new bull market is under way.Low interest rates are good for risky assets

Red Weekly:The U. S. stock market has performed strongly since Sept. 24, almost near a new high as of Oct. 21. What do you think of the recent rise in the US stock market? Is this a new bull market?

Pelosky:Global stock markets have risen from the slump since March, first of all because of abundant global liquidity, including Japan, the United States and China, where many major countries have adopted active fiscal measures to support their economies for the first time in many years. More importantly, because economic stagnation is set by policy makers, they take the initiative to shut down the economy temporarily, which means that the recession occurs immediately when the policy is launched. at the same time, economic data hit rock bottom and began to pick up (as soon as the economy restarted).

The stock market is forward-looking, so the rally makes sense, especially for technology companies that benefit from WFH requirements.

Even so, there was a period of correction in the US stock market in September, which I think is healthy. First of all, the stock market returns are low from September to October every year, which is an inevitable seasonal factor. In addition, the US stimulus policy and the upcoming election have brought a high degree of uncertainty, which will also lead to the profit-taking of some investors.

But as long as the market has a clear understanding of the stimulus, the US election and the timing of the vaccine, a healthy decline will lead to further gains. I think we are in the early stages of a new bull market that could last for years.

Red Weekly:You are currently focused on the economic stimulus policy, the US election and the advent of vaccines. How can you use them to guide investment?

Pelosky:These are the three directions that I am most concerned about at present, and they are also important factors affecting the market, but they are still in uncertainty, and I hope to have some clear conclusions in the coming weeks to months.

As of October 23, we have less than seven trading days to go before the US election, and when the dust settles, we will know the direction of policy. If Biden is elected and the Democrats have an overwhelming majority in both houses of Congress, then there may be large-scale economic stimulus policies in the future; and if Biden is elected president, while Republicans control the Senate, it means that the stimulus will be greatly reduced, because Republicans will block the spending of the Biden administration. If Trump is elected and Democrats control the House of Representatives, it could lead to a medium-sized stimulus package.

Personally, I look forward to the Democratic Party's victory, that is, the "Rambo attack". We also expect the results of phase III trials of the vaccine to be announced within 3-6 months. For now, the combination of synchronized global economic recovery, abundant liquidity, the conclusion of the US election and the advent of vaccines suggest that we are preparing for a global economic boom in 2021 and beyond, supporting risky assets at low interest rates.

Globalization is over.We have overmatched the technology stocks in Europe, Japan and China.

Red Weekly:The only certainty in the world is "uncertainty", but we all want to find "certainty" as much as possible in investment, so how does your overall research framework keep pace with the times?

Pelosky:Our research framework starts with the three-pole world (TPW) theory. After summing up our investment experience over the past 10 years, we believe that globalization has come to an end and has been replaced by regional integration of the three major regions, namely, Asia (led by China), Europe and the Americas.

From the origin of the North American Free Trade Agreement 25 years ago, to the 2008 financial crisis, to Brexit, Trump's presidency and the Sino-US trade war, the TPW structure has been evolving. Focusing on regional integration in the three main regions of Asia, Europe and the Americas is a useful way to think about geopolitics, the world economy and financial markets.

Recently, the intensification of technology competition between China and the United States is one of the cores of the TPW framework. Some countries and regions in Asia led by the United States and China have respectively become two different camps, and there are more and more issues around technology and revenue, such as user privacy, anti-monopoly, digital tax, and so on.

Climate is also at the core of the current TPW framework, and in terms of climate, Europe is rapidly becoming the carrier of regional standards, as it is clear that climate change will not be addressed globally (the United States withdraws from the Paris Agreement), nor at home or locally, as evidenced by the impact of bushfires in Australia on New Zealand's air quality. How can these be applied to investment?

Specifically, this helps us consider how China can benefit from the Sino-US trade war, analyze the earnings of small companies, the room for development in emerging markets, and so on.

Within the framework of TPW, there is also our Global risk linkages (GRN) system, which is also our original work, which helps to analyze the economy, politics, policy and markets of the three regions and the world. This helps us understand the drivers of production and consumption, and we find that not only manufacturing, but also services in Europe and Asia are growing rapidly and can generate good returns.

Red Weekly:Is globalization really over?

Pelosky:I think so. I think it is possible that emerging markets will no longer be at the center of the global supply chain because we think each region will have its own production capacity. I believe that with the closer integration of China and Asia, both China and Asia have good prospects for development in the next few years. And judging from the flow of venture capital, this process has already begun.

I am more optimistic about non-American developed markets such as Europe and Japan. Both markets are cyclical stock markets and they should do well in the global recovery. The current allocation ratio of these two markets is also very low because the US has been the best market since the global financial crisis market bottomed out in 2009.

Red Weekly:How do you allocate the proportion of investment in the United States and overseas?

Pelosky:We are global diversified investors and use ETF to express our investment views. We are bullish on cyclical stocks, value stocks and small cap stocks in the United States, non-American developed markets such as Europe and Japan, and emerging markets in East Asia and China.

But we have reduced the allocation of US stocks relative to stocks in other parts of the world. In ACWI (a global index compiled by Morgan Stanley Capital International), US stocks account for about 56% of the index; our weight is much lower than that. We have overmatched technology companies in Europe, Japan, China and East Asia (mainly South Korea and Taiwan) because we tend to put our technology exposure outside the US and also want to own technology stocks in the semiconductor sector.

Given that global interest rates are so low, the return on investment in fixed income products is not ideal. So we prefer emerging market dollar bonds, US high-yield bonds, and start looking for investment opportunities in the real estate market.

Interest rate spread and Capital Market openingMake Chinese assets favored by overseas capital

Red Weekly:Recently, "Sino-US economic decoupling" has been mentioned very frequently. What do you think of this?

Pelosky:Our "three-pole world" theory has long believed that China will pay more attention to internal and Asian development, which is the fastest-growing region in the world, and China can benefit from it. Many of Trump's policies have pushed China towards self-reliance more quickly, which I think makes a lot of sense.

As the world economy changes more to a regional economy, China's technological development, domestic demand, strong currency and other factors determine that China will be successful. We call the technological split between the US and China "Splinternet"; we believe it continues, and we expect Europe to become the technology regulator between China and the US.

Red Weekly:Will China attract a lot of international capital?

Pelosky:At present, China's 10-year interest rate is much higher than that of the US and Europe-an interest rate that attracts foreign capital, supports the renminbi and helps promote China's "two-cycle strategy".

At present, the size of sovereign debt with negative real returns exceeds $30 trillion, so the pursuit of yield will remain an important part of the investment pattern. We expect interest rates to remain low over the next few years, as hinted by the Federal Reserve and the ECB, so investors will be interested wherever there are yields.

Red Weekly:Do you have any comments and suggestions on the opening of China's capital market?

Pelosky:I think the opening of China's capital market is very beneficial to China and the rest of the world. At present, China has basically overcome the epidemic, fully liberalized production and operation, and is improving domestic demand through the "dual cycle strategy." Further opening up the capital markets can reduce dependence on the US dollar. At the same time, the strengthening of foreign exchange can also support the "dual cycle strategy".

In addition, further opening up of capital markets will help markets become more specialised, shorten boom-and-bust cycles, support China's demand for foreign exchange when the current account surplus disappears, and contribute to broader integration in Asia.

The market is in the early stage of the growth of value stocks.Asset allocation can be done with the help of ETF tools

Red Weekly:Did you adjust your position after the outbreak?

Pelosky:Right,We have shifted our "technology value barbell" to more valuable and cyclical sectors of the market. We believe that we are in the early stages of rotation from growth stocks to value stocks, from technology stocks to financial stocks, industrial stocks, materials stocks and so on.

Technology stocks have made huge gains from the demand to work from home and the collapse in interest rates, which has pushed up the cash flow valuations of technology stocks. I expect a 180 °shift in economic growth, vaccines, working from home and interest rates in the coming months. For example, rising interest rates and the advent of vaccines are negative for technology stocks, but significant positive for financial stocks. And financial stocks are the main allocation section of most value ETF.

Red WeeklyThe Chinese stock market and the US stock market have a common feature in recent years, that is, the valuations of growth stocks have been rising, but the valuations of value stocks have been low. Do you think the bubble of technology stocks will be punctured?

Pelosky:Value stocks tend to perform better when economic growth generally picks up. Although we have emerged from the economic trough of March-April, in the past few months, we have been surprised to find that the performance of the value sector is not as good as historically shown. For example, the rise in PMI usually leads to a rise in value stocks, but the rise in value stocks has not been remarkable in the global PMI uptrend in recent months.

I think the main reason behind this is that long-term interest rates in the US and Europe have not really risen, thus weakening the upward signal for value stocks, especially for financial stocks. However, I believe we are in the early stages of this trend, with long-term US Treasuries (UST) likely to fall below support, but US financial stocks are expected to break through long-term resistance. Fiscal stimulus and the advent of vaccines are likely to lead to a bear market in US Treasuries. In such a market, it is of great significance to understand and combine technical analysis.

Red Weekly:So in your opinion, the traditional valuation method is still valid.

Pelosky:Right. I believe that value investment is still a valid concept and look forward to it ushering in spring in the near future.

Red Weekly:From the perspective of value investment, do you have any thoughts on health, family and life?

Pelosky:I firmly believe that if one wants to achieve long-term success in his investment career, he must strike a good balance between work and life. This is not an easy industry to succeed because you have to compete with smart people from all over the world who are putting their own or other people's capital at risk.

In order to run marathons at the speed of sprinters, we need to maintain a good physical and mental state. I stretch and meditate every morning, a habit that has been going on for more than 20 years; I exercise regularly and spend time with my family, including my two teenage sons.

Red Weekly:Finally, let's give some suggestions to our Chinese investors.

Pelosky:I encourage Chinese investors to learn from ETF, which I think is a good way to express the concept of asset allocation. If a person does not focus on the screen during trading hours, then investing in a single stock is very risky. With ETF, although you may not be able to catch the huge gains of fast-rising stocks, you will not suffer huge losses from rapid falls.

I also encourage Chinese investors to focus on markets outside China, starting with Asian markets and then focusing on the US and European markets. With the opening of China's capital market, I expect that the ability of Chinese investors to invest abroad will also be improved. This is a process that many emerging markets around the world are going through. I'm glad to see this because I started my investment career by focusing on emerging markets in Asia and Latin America.