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- Direct Lending shows vigorous growth
- Private Credit market has shown strong growth in recent years, with Direct Lending being the main driver of this development.
- In the U.S., Direct Lending is already much more diversified and established, but Europe is following closely.
- For investors, this segment can offers the opportunity for solid performance and sometimes even outperformance compared to other investment forms.
An exciting election, not necessarily all as consequential as it might feel along the way
“The most important election of our lives” is a beloved cliché among U.S. political pundits. Headline writers and advertisers tend to roll it out almost every four years.[1]
In that sense at least, 2024 will be no different – but it will feel very different, not least to investors around the world. We would argue that this reflects not just experiences of the past eight years: political turmoil, starting with the Brexit saga, leading to market turmoil. Rather – and as we pointed out in our Special previewing the 2020 U.S. elections – U.S. politics has been undergoing one of those seismic shifts that happen only every few decades. To a large extent, that reflects changing electoral coalitions of both major parties.
On economic policies, especially on trade, the swing away from the Republicanism of the 1980s under Ronald Reagan was already well under way by 2020. Increasingly, we are seeing signs of similar, but very erratic shifts of Republican thinking well beyond trade, from foreign affairs to monetary policy.[2] Aid to Ukraine has been a prime example of how fractious Congressional Republicans have become.[3]
Such splits – in either party – are hardly unprecedented.[4] The growing tendency to look inwards among Republicans has deep roots within conservative thinking. To find an example of isolation being on the verge of dominance, you have to go back to the 1940 Republican nomination fight and Wendell Willkie’s surprise victory over those wishing to put “America First” back then.[5] For now, though, the influence and staying power of full-blown American isolationism should not be overstated. Any Republican administration, whether it comes to power after the 2024, 2028 or 2032 will necessarily be constrained by global realities as they might exist come inauguration day.[6] Still, it is no wonder America’s friends and allies around the world are looking at every twist of this particular U.S. election campaign with great interest and some concern, not least in the light of last week’s debate between the two candidates.[7]Joe Biden’s stumbling performance led to a renewed chorus of calls for him to drop out.[8] Such scenarios have always been possible, but we would caution a bit of patience might be in order, at least until there is more polling evidence – voter reactions can be quite unpredictable.
1 / Term limits and the next U.S. president
1.1 Chances still are that the next president will become a bit of a lame duck quite swiftly
From a market perspective, though, there is a particular feature of the 2024 U.S. presidential election that is arguably far more significant. Think about it as the most overlooked fundamental of this election season and its aftermath, in terms of potential consequences for the U.S. economy and financial markets.
This is because at least in one important way, 2024 is likely to be objectively unprecedented.[9] It still seems likely, though still by no means certain that there is a rematch of the 2020 nominees of the two major parties, with no other candidate having much of a chance.[10] If so, that would be the first time in more than 100 years that a sitting U.S. president and a former incumbent end up facing each other in the general election (1912 comes closest). All previous instances, moreover, happened before the ratification of the 22nd Amendment to the U.S. Constitution in 1951, limiting presidents to two terms.[11] This means that if either Trump or Biden wins in 2024, the next president will be term-limited, unless the Constitution is amended which is extremely unlikely. At least in a modern U.S. context, seasoned observers and even historians have never seen anything quite like this.
Thinking through the implications of this for particular areas of policy is quite tricky.[12] The term “lame duck” appears to date back to the 18th century London Stock Exchange (LSE), referring to a member who could not settle his debts and was therefore forced to waddle out of the exchange alley (i.e. lose their LSE membership).[13] Like the threat of default, the prospect of becoming a lame duck can thus encourage risk-seeking behavior. In politics, it typically refers to an ineffective leader – someone still in office but not really wielding much power any longer, for example a second-term U.S. president having lost badly in midterm elections.
Applying this idea to 2024 and its likely aftermath requires understanding where presidential power – in the U.S. and elsewhere – comes from. The U.S. presidency may be the most powerful elected office in the world. But as in other highly personalized systems of exercising power, U.S. presidential influence partly stems from deciding who is punished and who is rewarded not just in the present but well into the future. The shorter, or less certain, that future time horizon, the less credible is the threat of presidential rewards or punishments.
Similar dynamics are at work in any personalized system: they apply to aging kings or elderly autocratic leaders, as much if not more so than to democratically elected politicians. In such systems, leaders often intentionally divide and conquer elites. It all looks stable until the leader falls gravely ill, faces a massive drop in popularity or is simply of an age that fosters expectations of power changing hands and triggers a wave of speculation about potential successors.[14]
In our view, this basic fact about 2024 is more important than anything either of the two leading candidates ends up saying or promising between now and the November election. Barring a change at the top of either parties’ presidential ticket (with some other Republican or Democrat replacing the current nominees), U.S. term limits mean that it is highly probable from the outset that either of the two leading candidates will become a lame duck – eventually.
2 / Waddling towards lame-duck status
2.1 Three plausible scenarios for the election and its aftermath
Over the next couple of months, countless pages will no doubt be filled in trying to forecast this year’s U.S. election outcomes – including, presumably, by us. For both the presidency and Congress, this election will be fascinating but tricky to get right. Both major parties’ presumptive nominees are old and historically unpopular among the general electorate.[15] Added to this are the complications from the way the United States elects its president through the Electoral College, a topic we will no doubt return to frequently.
For now, a few big-picture observations will suffice. Both leading candidates appear to be struggling to win above 50% of unusually many states, and it is far too early for pollsters to make more than educated guesses about the likely composition of the electorate.[16]Add the uncertainty over where and which independent or third-party candidates will gain ballot access, and how they will run their campaigns, and we would certainly caution against focusing too much attention on what national polls, let alone swing-state polls currently show; the electoral landscape might look very different come November.[17]
Other measures such as the generic Congressional ballot similarly suggests that voters remain unenthusiastic about entrusting all power to either one of the parties.[18] In short, the electoral landscape continues to leave plenty of surprising twists, from changes to either presidential ticket and unusually strong independent candidacies to outcomes in which both nominees fall short of 270 electoral college votes.[19]Voters who are disenchanted by both Trump and Biden almost per definition rarely know months in advance what they might do in November.[20]
For investors, we would argue that it nevertheless makes sense to focus on gridlock and divided government of various stripes, as the range of base cases most worthy of their attention. For the purposes of scenario planning, we would highlight three fairly plausible ones, similar to the ones we introduced in 2020. Think of these as middle instances within a probability distribution, capturing all the outcomes that look fairly plausible, while ignoring the more unlikely outcomes at either extreme:
- Mushy Middle: This set of outcomes is typically epitomized by various combinations of a divided government. The precise outlines of any such combination could have big implications for individual sectors. For broader markets, though, the main takeaway is that the need for bipartisan compromises limits the scope for major surprises.
- Liberal Limp: A second set of outcomes instead has everything, including key Senate races, falling Democrats’ way. We would caution, however, that the boundaries between “Liberal Limp” and “Mushy Middle” are quite fluid. Given an even greater reliance on centrist House Members and Senators, we would expect any Democratic sweep to be less consequential and also short-lived (leading to the loss of one or both chambers in the 2026 mid-terms). And even before then, there would be a risk of death, scandal or resignation shrinking the majority.
- Trump Theater: Finally, a Republican sweep needs to be considered, mainly because this too serves as a reminder for what it would take to move very far from our “Mushy Middle.” Another Trump presidency would bring plenty of day-to-day drama for market participants to watch, but at least right now, it is hard to imagine an electoral outcome that would allow for much of legislative legacy beyond extending most of the Trump tax cuts. Republican majorities would be too narrow and Congressional delegations too divided to get much done.
From a market perspective, this way of thinking may allow you to tune out much of the noise surrounding U.S. politics, probably until the campaign starts in earnest around Labor Day 2024 in early September. Until then, in our view, there are only two key questions to consider when thinking about any news story. Does it significantly move the needle towards or beyond an outcome of "Liberal Limp?" Or towards or beyond that of “Trump Theater?” In other words, investors should look beyond the horse-race question for the White House and instead consider if either party might be gaining so much voter support to be on track to also control the legislative agenda.
For both parties, moving beyond our “Mushy Middle” adjacent small sweep scenarios looks likely to be a tall order, but for slightly different reasons. For one party to control the legislative agenda requires a combination of sufficient majorities and party cohesion in the next Congress.
Democrats look set to mainly struggle with the former. It is easy, for example, to imagine a political landscape, come November, that sees Joe Biden or some other nominee securing victory fairly easily in the Electoral College, but Democrats only edging out a very narrow victory in the House of Representatives and losing the Senate, due to what looks like a very unfavorable Senate map.[21]
For Republicans, it is of course also possible to imagine outcomes would see Donald Trump winning the White House, but instead of coattails, proving a liability to Republican candidates in key Senate and House races, handing Democrats control of both chambers of Congress.[22] Such a split verdict would severely limit the policy-making scope of any new Republican administration, perhaps more so than Mushy Middle Biden scenarios, given Trump’s more limited experience in effectively cutting deals with political opponents.
If we instead assume small “sweeps" with narrow majorities, there is still a basic asymmetry between the two parties. The main surprise following the last presidential election has been how – for better or worse, in terms of policy content – Democrats were able to pass consequential laws in 2021 and 2022, despite very narrow majorities.[23] By contrast, it has become quite hard to tell what policy priorities a new Republican administration might wish to pursue, in part because of the party’s changing electoral coalition. Its scope for maneuver is likely to be severely constrained by tight majorities in Congress, as well as Republican fractures, to an even larger extent than was the case from 2017 to 2018. Back in 2020, we wrote about such a scenario – Trump returning to the White House and Republicans winning in both Houses of Congress, saying: “For markets, that might mean tax cuts are back on the agenda. Deregulation could continue unimpeded. But so too might the potential for further trade tensions.” Since then, tariffs and other trade measures have increasingly become a bipartisan pursuit, especially with regards to China. Given that Congress has the power to set tariff policy under the U.S. Constitution the direct impact of another Trump term even on trade should not be overstated, in our view.
These relatively mild variations around our Mushy Middle scenario are likely to contrast with some of the more overblown assessments you will be reading elsewhere. In such an environment, it seems quite likely that markets will occasionally take fright, whenever an emerging apparent trend or headline catches them by surprise.[24] Old hands on Wall Street, however, recognize that it is far too early to assess which, if any, major policy changes might be in the offing beyond 2024. Indeed, a good, initial approach – at least until Labor Day 2024 – might well be not to get carried away by political headlines, including in terms of implications for specific sectors.
Conclusion:
- To summarize our argument, we do not expect this be the “most important U.S. election of our lives”. But it might well feel this way in coming months. For investors, this could create opportunities along the way, if markets get unnerved and temporarily end up overpricing political risks.
- Such overreactions seem understandable. For much of the past 30 to 40 years, U.S. voters could safely take many (small “d”) democratic norms for granted, contested as many of these have been in previous periods of U.S. history.[25]
As we have pointed out repeatedly since our 2016 CIO View Special, America's founding fathers were assiduous in avoiding any one person or branch gaining too much power. - Hence, the emphasis on checks and balances. Broadly speaking, this remains as true today as it was in 2016 and 2020, especially if you look at the current moment in U.S. politics in a comparative perspective.[26] Even in far more recently emerged democracies, consolidating power in an open society is never easy and rarely happens in one day, as illustrated by events in Tbilisi, Georgia, in recent months.[27] Indeed, some of the risks we and others were worrying about in 2020 and the months that followed have since diminished due to legislative action.[28]
- Instead, U.S. term limits mean that it remains highly probable from the outset that either of the two leading candidates will become a lame duck – eventually. Three plausible scenarios for the election and its aftermath, Mushy Middle, Liberal Limp and Trump Theater all have in common that the next U.S. president is likely to have less sway over policy than one might expect in a “normal” presidential election year.
