International conflicts represent the biggest risks facing investors, largely overshadowing a U.S. presidential election whose possible outcomes have already been priced into the market, two veteran investment managers said at the BNY Mellon Pershing INSITE 2024 conference in Nashville, Tenn.
The current conflicts between Russia and Ukraine, and Israel and Hamas, are driving the risk, according to Jenny Johnson, president and CEO at Franklin Templeton, and Hanneke Smits, senior executive vice president and global head of investment management at BNY Mellon,
“The greatest risk right now is geopolitical. Full stop,” Smits said, adding that conflict between China and Taiwan seems unlikely.
Johnson said the international risks overshadow a U.S. presidential race that has already been priced into the market.
“You have to remember that the first time Trump was elected, everyone thought the market was going to tank and it didn’t happen,” Johnson added. “So this time around I also think the election outcome is priced in.”
Johnson and Smits were keynote speakers on Wednesday at the three-day annual BNY Mellon Pershing conference.
In addition to their take on political impact, they also discussed U.S. debt, retirement savings and where investment opportunities lie for wealth managers in the coming years.
“I don’t think we’re talking enough about the long-term impact of the U.S. debt,” Johnson said.
In 2007, she said, the U.S. had $9 trillion in debt, which as of 2024 has ballooned to $35 trillion, or 120% of gross domestic product.
“We are not under threat of not being the reserve currency. We’re going to continue to be the reserve currency because there’s nowhere else to go,” Johnson said. “The problem is that 70% of U.S. debt is going to turn over in the next six years, and unfortunately what we didn’t do is lock in long-term Treasurys when rates were really low.”
Currently, she said, the U.S. is paying about 2.4% interest on its debt burden. But with the turn over, that will rise to 3.5%.
“Just a 1% difference crowds out so much other spending. Already this year we’ll spend more on interest than we will on defense spending,” she said. “Where is that money going to come from?”
Not from retirees, they agreed, as that group has enough on its plate.
“Helping clients manage or retirement of course is a very big topic. A very big topic that is keeping everyone here [at the conference] very occupied,” Smits said. “How do we as investment managers offer better solutions to the advisors who work with their clients so they can actually retire with higher income.”
Providing for income as well as an opportunity for growth puts advisors in a position where they’re probably looking at a combination of equity investing and alternatives investing on the growth side.
“That’s a strength that’s long been underway in asset management, but you need to have a more holistic view in terms of what you want to achieve as you move into retirement,” she said.
Johnson identified the trends to watch out for on the investment landscape as the four “Ds,” and leading the pack was demographics.
Johnson said demographics are going to hold the key to new, high-growth investments and the fact that developed economies have aging demographics and developing economies have younger demographics will play out in two ways.
“In developed economies, there will be an impact on investment opportunities, but there will also going be a drag on the economy as a younger, small workforce has to support the folks that are older,” she said. “And then in those economies that are developing, like India, where 56% of the population is under the age of 25, there will be even more opportunity.”
The three other “Ds” included disinflation, decarbonization and digitization.
“Reorienting supply chains is going to be an opportunity from an investment standpoint, but it’s also inflationary. There was a reason you were in China, and you were in because it was cheap,” she said. “As soon as you decouple and change the supply chain, you’re going to be adding some cost to that, not to mention tariffs.”
While the U.S. struggles politically with the issue of decarbonization, 90% of European nations have committed to net zero policies.
“Whether they get there or not is irrelevant,” she said. “They’re focused on investing for that.”
Digitization, from AI to blockchain, is also expected to drive investment, they said.
Smits said she found the trends and the audience’s optimism attached to them “quite interesting.”
“Take a step back and think about these trends. Trends create uncertainty. They can also create opportunity. Because when there’s more volatility in market responses, people will respond differently,” she said. “And that’s where opportunities emerge.”