Multi-strategy hedge fund Algebris’ macro chief eyes Biden victory in US election battle

US Congress sunset

A victory for Democratic candidate Joe Biden in the approaching US presidential election would see a “limited short-term negative reaction”, and could herald more fiscal stimulus coupled with a dovish monetary policy, according to Algebris Investments’ head of macro strategies Alberto Gallo.

Gallo, portfolio manager of the Algebris Global Credit Opportunities Fund, believes the Democrats are now favourite to win November’s election, and said a Biden presidency will mean more stimulus to the real economy.

“Contrary to popular belief that a Biden victory means immediate tax hikes and a hit to risk assets, we expect limited short-term negative reaction and better long-term prospects,” Gallo wrote in his ‘Silver Bullet’ market commentary this week.

Gallo – whose credit opportunities hedge fund strategy trades bank debt, sovereign bonds, and investment grade and high yield corporate debt long and short – suggested a Democratic administration would prioritise fiscal expansion over reversing corporate tax cuts.

“Our model based on adjusted state polls suggests an 82 per cent probability for him to secure over 270 electoral votes,” Gallo said of the veteran Democrat challenger’s prospects.

But a Democrat sweep in the senate is less likely, with its result there falling short of the 60 seats required to pass “bipartisan legislation for controversial tax changes.”

Biden’s plans for higher public spending would help support job creation and boost long-term productivity, and his administration would offer “more certainty” for US foreign policy, bolstering international trade.

Pointing to a shift in political mood music, Gallo observed how the Covid-19 crisis has highlighted the need for Western governments to boost growth, invest in social welfare – including healthcare – and infrastructure, as well as reducing inequality.

While the Federal Reserve may be more independent under Biden, short-term rates will likely remain near their all-time lows, he added.

“The Federal Reserve may try to use monetary policy to address inequality, even if it comes at the risk of higher inflation,” he said.

At the same time, Biden’s proposals will likely put more money in the hands of lower-income earners, who historically have had a much higher propensity to spend.

Gallo cited survey data indicating some 9 per cent of 2016 Trump voters are likely to switch to Biden, while just 4 per cent of 2016 Clinton voters are set to back Trump.

“While there are doubts over poll reliability after the 2016 elections, we believe Biden stands in a stronger position than Clinton in 2016, with more consistent polling lead even in battleground states like Michigan, Pennsylvania and Wisconsin.”

He said the biggest risk is a potential delay in vote counts due to mail-in ballots, with a “significant proportion” of voters in closely contested states likely to vote by mail, with such mail-in voters largely skewed towards the Democrats.

Recent surveys by Citi and Goldman Sachs suggest investors are already pricing in an elevated probability of a contested vote at over ten percent, while pricing only around 50% for a Biden victory.

Multi-strategy credit and equities hedge fund Algebris Investments, which was established in 2006 by founder and CEO Davide Serra, an Italian-born former UBS and Morgan Stanley analyst, focuses on a broad range of credit, equity and non-performing loan markets.

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