New value opportunities mixed with potential US political upheaval means the 2024 election is critical to determining the near-term future of US markets, said Eric Cantor, former House Majority Leader (R), House of Representatives, United States Congress, and Vice Chairman and Managing Director at Moelis & Company.
Cantor spoke at an insightful fireside chat with Tom Heck, Chief Investment Officer, Ball State University, at Clear Path Analysis’s inaugural Insurance Investor Live | Midwest 2023 event in Chicago this week.
“Even corporates are able to go in [now] with more bespoke
ability to fund capital needs."
Asked where he saw opportunity for new value in H2 2023 and beyond, the former House Majority Leader said that M&A transactions were currently helping boost capital flow — and especially the viability of private credit. “Even corporates are able to go in [now] with more bespoke ability to fund capital needs,” he said. Cantor added that whilst the asset class is more expensive, he sees private credit uptake as a main trend, “at least until Washington catches up”.
This shift is particularly salient — and was a consistent topic of discussion throughout the entire event — due to investors taking a step back from turbulent public markets and looking more intently at private finance, especially credit and equity. “[Insurance investment teams] are interested in what’s going on with Powell and the Fed, mainly with interest rates,” said Cantor, referring to the US Federal Reserve and its Chair Jerome Powell’s recent tightening cycle halt.
When it came to future rate hike predictions, Cantor said that ongoing inflation — combined with a perpetually just-looming recession — was the singular most difficult issue facing US investors in 2023. “I’m not an economist; I’m a lawyer by training, but it seems that there’s a commitment on the part of [US Federal Reserve Chair] Jay Powell to maintain the battle against inflation,” Cantor said.
An ongoing uphill struggle against inflation means continual incremental rate hikes without forcing a full-blown recession. Many senior leaders in attendance at the event said that they felt US markets were suffering more from a potential recession that was always on the horizon, just out of reach, than they would from a definite period of economic decline.
“You need to think, ‘what policies might pivot?’. There is an irrationality in
Washington compared to the rationality of the business world.”
To this, Cantor said that he hoped asset seller expectations would adjust and catch up with buyer expectations — particularly because, from a strategic standpoint, M&A decision making can be a slow and painstaking process. In his view, insurance investment teams should always be on their toes, investing across political horizons and election cycles.
“You need to think, ‘what policies might pivot?’. There is an irrationality in Washington compared to the rationality of the business world,” he said. Cantor was speaking to the fact that if the Republican nominee beats out current President Joe Biden in the 2024 US election, fiscal and monetary policy will likely shift — and, in certain cases, quite drastically.
“The 2024 cycle depends on who wins [the election] and if there is a unified Republican government,” noted Cantor, referring to the possibility of Republicans assuming control of the presidency as well as the House and the Senate. If that happens, he predicted an extension of the 2017 tax law enacted under Donald Trump, which sanctioned a significant reduction in corporate tax and tax on high-income earners.
“There would be a Battle Royale with the Europeans, who will try to make
sure there are additional tariffs applied to global services.”
“That law expires in two years, and there’s a $3.5 trillion tax cliff. The situation is similar to what happened with tax cuts under [George W.] Bush. We would likely see a continuation of current rates under that law,” continued Cantor. This turn of events would likely benefit insurers’ investment portfolio returns whilst hurting many of the individuals they service across the US.
Cantor was sceptical about Biden’s 2022 landmark Inflation Reduction Act (IRA), a 10-year plan that aims to curb inflation by investing in domestic energy production and clean energy as well as reducing the federal government budget deficit — amongst other items. “A Republican-run government won’t accept this law,” he said. “Then there would be a Battle Royale with the Europeans, who will try to make sure there are additional tariffs applied to global services.”
In his view, the IRA is an oxymoron; it outlines trillions of dollars of spending to “supposedly reduce inflation”, in his words. Cantor added that the requirements and incentives on investment in renewables would likely be repealed by Republicans. “You cannot count on that law and its benefits to manifest if Republicans regain control of Washington,” he said to the audience of senior insurance investment figures.
Additionally, because the Organization for Economic Cooperation and Development’s (OECD) global minimum tax will be fully implemented at the end of 2025, Cantor was quick to note that companies should not redomicile.
Carbon tax from Europe will also be an especially sticky issue, said Cantor, referring to the EU’s Carbon Border Adjustment Mechanism (CBAM) complete implementation in 2025. “It will be a fight and the US won’t participate in shares from EU countries,” he predicted.
On the other hand, if Biden were re-elected, Cantor foresaw an increase in rates for high-income earners and corporates, without a wholesale extension of US tax cuts. “A continuation of the IRA will probably occur, as well as the acceptance of the global minimum tax.”
A divided congress, however, is where things could get interesting. In this scenario, Cantor foresaw the tax battle turning into a perpetual stalemate. “It will be difficult to get things done, like it is now,” he said.
For insurance investment teams, the takeaway on inflation was boiled down to the fact that it is a waiting game until July and September when Powell and the Fed are set to announce their next moves. For insurers with longer-dated liabilities — typically those on the life side of the aisle — manager due diligence and rational, research-backed investment beyond political cycles was the big-picture advice.
Taking advantage of private credit opportunities whilst they’re hot — and whilst public markets are floundering — was another theme, though the longevity of their appeal is not 100% certain.
