China | Europe | Fiscal Policy
This is an edited transcript of our podcast episode with Bobby Vedral, partner and portfolio manager at Toscafund Asset Management. We discussed the backlash on Big Tech, the new global tax accord, Biden’s stance on China, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Why the Backlash Against Big Tech Will Continue and the Trend Towards Unionization in the US
Bilal Hafeez (03:16):
So welcome, Bobby. It’s great to have you back on the podcast. I always enjoy our conversations. You always bring a different angle to markets, which I really do appreciate. Now, I know you’ve been looking at a number of different themes, and I think one that I found very interesting from your recent writings has been your view on the backlash against big tech on all sides of the world. Can you elaborate more about what you’re thinking there?
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This is an edited transcript of our podcast episode with Bobby Vedral, partner and portfolio manager at Toscafund Asset Management. We discussed the backlash on Big Tech, the new global tax accord, Biden’s stance on China, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Why the Backlash Against Big Tech Will Continue and the Trend Towards Unionization in the US
Bilal Hafeez (03:16):
So welcome, Bobby. It’s great to have you back on the podcast. I always enjoy our conversations. You always bring a different angle to markets, which I really do appreciate. Now, I know you’ve been looking at a number of different themes, and I think one that I found very interesting from your recent writings has been your view on the backlash against big tech on all sides of the world. Can you elaborate more about what you’re thinking there?
Bobby Vedral (03:40):
Yeah, thank you. Hey, Bilal. First of all, thanks very much for bringing me back. I’d say same thing – always love it to speak with you. On big tech, I think the real move that will happen over the next decade (and it had started four or five years ago) is what Branko Milanovic represented with the elephant curve. Basically, emerging markets have done very well over the last 20 years, from 1990 to 2010 – those servicing and benefiting from globalization and digitization have done very well. Meanwhile, the middle classes in developed markets have done very badly, or have not seen any improvement. And hence, what we will see is less globalization, a cut out of those who have done very well, and taxation of those who have been benefiting from this. And, obviously, big tech ranks very high on the list.
And what for me is very interesting is the biggest pushback I always got on this was that, “But Bobby, what about the tech war going on between US and China? Why would they want to weaken their champions?” And this is why I find it so utterly interesting. China has even started with weakening its own champions with a very, very public crackdown on Jack Ma and Ant last year. And I think when you look really at what happened at this five-year planning session, Xi Jinping was very outspoken about how the platforms had to be reined in. That happened, literally, the Monday after Tencent received a warning, so they are cracking down on their tech champions.
At the same time, we’re almost accustomed to Europe doing antitrust investigations, and the narrative is like, “Well, yeah, Europe does that because they have nobody.” But now you see the same narrative start to play out in the US Congress. That’s that top-down pressure. And now, there’s the bottom-up pressure. And you see that here in the UK, where there was the judgment that Uber’s drivers are not contractors or partners, but actually employees. We have the first potential unionization of Amazon’s employees in Bessemer. And then, don’t forget, Biden gave a speech in Philadelphia last week about the infrastructure package. He also announced his presidential run in Philadelphia where he said he would be one of the most unio- friendly presidents ever. And if you really looked at the people who have joined the Administration, we have, for example, Tim Wu, who just joined as White House Advisor for Competition Policy, very big tech critics. They generally are, I have to say, good critics, from the point of view of, “Guys, okay, they have to pay some taxes somewhere.”
A New Global Corporate Tax Accord and What That Means for Big Tech
Bobby Vedral (06:19):
That combines interestingly with how one of the first things Yellen did was to renounce Trump’s insistence on the protection for big tech from the new OECD tax accord. And I do think that the 21% minimum corporate tax rate Biden is speaking about will be what they’ll discuss at the OECD this summer for a potential tax agreement.
I think there is a crackdown coming, which I think is not necessarily negative. Taxation will be, certainly a short-term negative for the stock market but a more direct impact than an Antitrust Act. An Antitrust Act would split up big tech, but that could also not be necessarily negative from an equity perspective. You could argue that, for Amazon, for example, you’d probably get the books for free once Cloud services have been properly priced. So, I do think that, from an equity holder, you will probably benefit from that.
But we will probably see both. For taxation, I think there’s definitely something coming this summer. And if you look at this OECD agreement they’re working on, there are two pillars. One is the minimum effective tax rate, global effective tax rate, so I do think there’s definitely something coming. And, as I said, what I find very interesting is that both US and China are doing it in parallel to their own champions, which is very different to Europe doing it to champions where they have little skin in the game.
Bilal Hafeez (07:49):
Yeah. And is the investment implication then to underweight some of these big tech companies and just overweight other sectors? Or-
Bobby Vedral (07:59):
Absolutely, I’m pro-tech but probably very cautious big tech. If you look at Tesla, as an example, if I see Elon Musk call himself, “TechnoKing”, as his official title now, and you really wonder. If this is a joke, fine, but if this is hubris, then you do know that this is probably the peak. For me, what is also very interesting is that we have seen the Volkswagen story last month, (and I followed that quite closely), is that Germany was quite negative on EVs up until last year. The Volkswagen CEO was having quite a battle with his own union for pushing through the changes, which he won. In Germany, once they decide something, they tend do it almost as an all of society effort. So this is not just a CEO battling against the workers. No, no, this is the whole, I would say, the company, and the industry, and the nation turning. And then, I would say there’s a good chance that Tesla will now get serious competition.
Bobby Vedral (08:59):
In general, I do think that in the last decade, there was a lot about digital innovation, in which the US and probably China excels. Europe is not very good at disruptive innovation, but Europe is very good at incremental innovation and digital adoption. And now if you think of all the manufacturing and industrial expertise in Europe, then if we are now in this phase of digital adoption, then, if you combine this with the whole climate technology and advantage Europe has, there’s actually real pockets of excellence in Europe. Which is funny because on the macro level, everybody is avoiding Europe at the moment. It’s so exciting in the US and China, why Europe? But actually, if you look at the company level and you look at the very specific themes like climate technology etc., and you combine this with digital adoption, there’s some significant potential in Europe.
The Bullish Case for Europe
Bilal Hafeez (09:55):
It’s interesting that you’re painting a positive picture for Europe, because people, as you rightly point out, are always so negative on Europe, especially when it comes to technology. Now, some of the reasons why people are negative on Europe, at least at the moment, one reason is that they’ve done a poor job on the vaccination side. And, as a result, we’re seeing some lockdowns in some of the countries. Another is that, the US has multiple fiscal stimuli, the most recent one is the almost $2 trillion infrastructure one, whereas Europe hasn’t really announced any new fiscal packages. So that’s a second criticism of Europe. And then the third one is, people are concerned about the politics within Europe, whether it’s Macron losing some popularity because of the lockdowns and some of the other things he’s done, Germany’s dealing with post-Merkel world, Italy has Draghi. So there are three topics: vaccination, fiscal, and then the political side, how do you address those?
Bobby Vedral (10:45):
No, look, this is, as we discussed before, this is exactly why in the funds I’m building with my partner here, we go long selected stocks in Europe and hedge the macro. Because it’s exactly, as you say. There are some really nice overlooked, misunderstood, undervalued stories in Europe, but you definitely have to cut up the product.
Let’s start with the word Europe. What is Europe for me? For me, there are five Europes. There are the Nordics. They’re very different – very digital, very tech, very defense-oriented as well. Then, you have the Euro North area, which is a very collectively industrial area. Then you have the Euro South or Mediterranean area, which again, is more state-driven and, I would say in the short term, quite positive with Draghi. I think it will be a problem in 15 months when, statistically speaking, he will likely be out of power. But in the short run, there’s 200 billion going towards Italy. And then, you have UK and Switzerland, which are two different, very different opportunities. And then, the fifth is Eastern Europe and emerging markets in the European area. So, Europe is actually full of different ecosystems.
Bilal Hafeez (11:59):
Yeah, no, that’s a really good point. Yeah. It’s a bit like how people talk about emerging markets, as if emerging markets is just the same thing, where it’s very different. Europe is very different.
Bobby Vedral (12:07):
That’s exactly it. Most people, when they say Europe, they think of the EU or Eurozone, which, even if you look just at the equity markets, is madness, because the biggest equity markets are actually in the UK and Switzerland. And if you look at just the UK story, it’s very interesting because the FTSE 100 is a value story on one hand. It has lots of mining, lots of finance, and could be a very interesting recovery story. FTSE 250 is domestic. But then the UK just applied to the CPTPP, so we have a very interesting potential economic area from Japan, Australia, Singapore, UK, Canada, and potentially the US joining or rejoining in the future. Very interesting. This could be very beneficial for the UK. So, I would say, there are very interesting pockets of stories and you just have to pick the correct one.
I do understand why people underweight Europe. For the size of the market, compared to China or the US, they only have to understand one government, the US or the Chinese. While in Europe, yes, you do have to understand 20 governments and their respective industrial policies. But if you do understand them, then that’s actually quite a big advantage. And so, I think in Europe, this combination of on-the-ground knowledge of industrial policies, plus how the political economies of these respective countries work, helps us to determine which type of industry will benefit. This heterogeneity makes Europe very difficult to understand, which hence explains this duality you just said. Then, how can you be positive if you’re negative? No, no, I’m negative macro, I’m positive micro.
Germany in A Post-Merkel World
Bilal Hafeez (13:40):
Well, I guess as an investor then, there’s opportunity for alpha as a result, probably more opportunity for alpha compared to, say, the US. One question, say on Germany. Obviously, Germany is the, in some ways, the bellwether of Europe, you could say. What’s your view on Germany? We have Merkel. It seems like we can’t settle on a successor to her. Every time you think there’s a successor, it turns out not to be the case. The Green Party’s popularity is rising. When you look at the politics. First of all, what do you think’s going to happen on the politics side? And then, secondly, is it important for the economy and markets?
Bobby Vedral (14:12):
Yeah, look, for Germany, politics is definitely very important. It’s the opposite of Italy. There, the politics doesn’t matter and the country grows (or not grow) – the average life of an Italian government is 15 to 18 months but Italy is still the sixth or seventh biggest economy in the world. This tells you that obviously it doesn’t matter too much. On the other hand, in Germany, it definitely matters. While in Italy, an average government lasts 15 months, Merkel has been there for 15 years. So, for me, the problem of the German system is that it tends to have chancellors for too long. Then literally, the reason they also have been so long is because they’ve killed anybody who was a threat, hence there is no real succession.
And I do think here, I would have guessed, or still at the moment, that the government in September will be Union CDU/CSU, so center-right. The Greens are a party which has grown up significantly. I would also say the Greens are in the running. If you look at how they run the state of Baden-Wurttemberg, which is a state of Daimler and Porsche, businesses are very happy with them. If you think about it, now with Germany having done this massive turn to EV, well, that’s what they have been saying all day long.
Now, many actually look at them and think, “Actually, they have a plan and actually they were right.” And the good thing about the Greens, what I like, is also when it comes to Europe, they are like, “Listen, guys, we either have to further integrate, or we will blow up.” And, obviously, they then say, “But we have to integrate, hence we have to integrate.” But what we can’t do is this kicking the can down the road type of thing. So, if they will be in government, the question is, will they be Chancellor or Vice Chancellor? If they have the Chancellorship, I think that’s very good for the Europe South, because they will push for bigger integration of Europe. They’re obviously very pro-European.
Bilal Hafeez (16:01):
But is it possible for them to be Chancellor, as a smaller party?
Bobby Vedral (16:04):
To be honest, the biggest problem right now with the CDU/CSU are the corruption scandals. So we have, obviously, lots of stories at the moment of politicians who made money during the last year, selling PPE to the government or being middlemen. And they’re all, unfortunately (or fortunately) CDU/CSU politicians and that is going down extremely badly with the people. The vaccination rollout disaster adds to it, but this corruption is really what’s hurting the CDU/CSU at the moment. And you perhaps see a scenario where, if the current momentum of the collapse of the CDU/CSU isn’t halted, the Greens could have enough votes for a coalition with the SPD and the FDP. And then, you would have a green, red, yellow coalition. So, it’s possible. At the moment, I still would say it’s going to be black, green, so Union with the Greens.
If the Union (CDU/CSU) provides the Chancellor, I would, at the moment, guess it’s Söder for the very simple reason that in the polls, Söder is leading to Laschet. And between the corruption scandals and the vaccination roll out, they really have a problem. They can’t gamble too much by the CDU insisting they are the bigger party and hence should provide the Chancellor. And then, you also have the historical precedent of when Kohl ran for chancellor, he led the CSU man go first, and the same thing with Merkel, Merkel let Stoiber go first in the first attempt to win the chancellery.
Bilal Hafeez (17:31):
And does Soder have a particular ideology, would you say, or is it just more details?
Bobby Vedral (17:38):
Well, look, because obviously Merkel is personally quite popular, if they see it works, it’s beneficial for the campaign to be seen as continuation of Merkel, they will do that, but they are clearly not. Merkel is somebody who grew up in the East, Merkel is very cautious by definition. On the other hand, if you think about all the candidates on the CSU side, they’re from the Rhineland (that’s our industrial heartland) and the Rhineland people are the carnival people. These guys are way less cautious than people from the East. And all of them were, Rottgen, Laschet, Merz, Spahn, all of them, Rhinelanders. And so, if even Laschet goes in, or if Soder, and we have a Bavarian, I think we will get a Germany that definitely is going to be different to the Merkel Germany.
Also, because I have to say, you do see now, and you see this a little bit with the industry and with the Volkswagen story, they are also waking up to the fact that Germany needs to change. The last real reforms Germany has done was Schröder in 2000. In fact, Merkel has benefited massively from the Schröder dividends. She, herself, has not done really any major reforms.
Bilal Hafeez (18:48):
Schröder, you’re talking about the labor market reforms he did?
Bobby Vedral (18:51):
The labor market reforms of 2000, absolutely, which cost him the Chancellery – that is why Merkel became Chancellor. But at least he did the right thing. This is why Germany became so strong. If you look at the major measures Merkel has done – she’s seen as kind of the statesperson, but ultimately, letting 1 million refugees in was humanitarian, but it certainly wasn’t multilateral. She didn’t ask anybody, neither on the European level nor the parliament. Buying Russian gas isn’t very multilateral, all Eastern Europeans hate it. Plus, with the US, switching off nuclear in 2011, Germany’s up like 20%, 30% CO2 pollution since because we had to fall back on coal and one of the most expensive energy prices. So overall, tell me one reform she has done that has actually had the effect of Schröder’s performance?
Schröder definitely has given, despite all his personal faults, with his closeness with Putin and Blanc, the labor, and hence economic reforms, which is the reason Germany has been so strong in the 2010s. And Germany, I think, would say in general, notice the weakness, and I think the turn right now with the car industry’s a very, very good sign. But you see this pressure coming from below, also from industries, like, “Come on politics. You also need to wake up. We cannot just continue in this limbo state.”
Bilal Hafeez (20:08):
And do you think there’ll be more fiscal stimulus next German administration or not? Because that’s always been the criticism of Germany that they never do enough on the fiscal side, that they always want to put a fiscal break on, and all of those sorts of things.
Bobby Vedral (20:22):
If the Green’s come in, definitely there is a good chance. The bigger problem is, as you said before, compared to Biden’s second package (probably the second part of the second package is soon coming), the 750 billion in Europe looks too small and too late. And so the big question is, and especially given the second and possibly third lockdown, most likely the south will need more money. And this is now the big, big thing. This is why Draghi is so central; if he can push through reforms and make it seem that Italy is on the right path, at least in the eyes of the German public and German politicians, then the question is, how likely will there be a second, or top up, to the current European Recovery Fund? Because I think that’s the real question – how possible is fiscal reform at European level? And that’s why Draghi’s position is so central at the moment. Couldn’t be a better person, but at the same time it increases the risk because there couldn’t be a better person it’s like, “This is it, this better works out.”
Biden’s Differences to Obama
Bilal Hafeez (21:24):
And you mentioned Biden, what’s your bigger picture? What’s your sense of the Biden Administration? Obviously, he’s come in with a big bang, so to speak, with all the fiscal stimuli and so on. What changes should we expect from this administration?
Bobby Vedral (21:37):
Well, look, I think he clearly has learned the lesson from Obama that he knows the midterms are absolutely crucial next year. That’s why he’s going full in. He also makes big noise about it. So, unlike Obama who pretty much did the Healthcare Act, and then didn’t really talk about it. It’s like, “Okay, next topic.” Remember how the rollout was a complete disaster and [Obama] responded like, “It’s through, let’s talk about it, the next one.” So, in domestic policy, I think he definitely will want to make sure that people see he’s on their side. And this is also why he’s saying he’s going to be the most union-friendly. Because it’s quite interesting – in the US, according to the Gallup Poll, only 10% of Americans are unionized, but 65% support them. I found that a very astonishingly high number.
Bilal Hafeez (22:20):
Yeah, I’m surprised by how high that number is.
Bobby Vedral (22:23):
Very high number, which it just shows you though in which kind of political economy cycle they’re coming in. We’re definitely not anymore in the ’80s Reagan type of cycle, which we have been in for 40 years or 30 years. And, by the way, he’s just effectively fighting back the Republicans who have become effectively the party of the worker. So, he’s going to go in there very strongly domestically, I think. What is more interesting… domestically, it’s very little difference [from Trump], except obviously on the taxation front, that he will want to clearly make sure that it’s wealthy who gets taxed.
Biden’s Tougher Stance on China than Trump
Bobby Vedral (23:03):
The difference is in foreign policy, interestingly. Yes, he might not be as aggressive in his talking as Trump was, but if you look at China, it’s very interesting. So Trump really attacked China, mainly on trade, but definitely did not talk about human rights or environment. And I was always surprised by how, not relaxed, but calmly China took the Trump tariffs. You never saw a boycott against American products, which, to be honest, if you think about it, in 2000… What was it? When Japan did the Senkaku Islands, there was immediately boycotts against Japanese products. When the Koreans put American missiles on their ground, immediately there were boycotts are meant against Korean companies. Not a single boycott against American companies during the Trump administration. And now the interesting thing is with Biden, this is very different, because Biden actually has key points, human rights and environment for which Beijing considers internal issues. You don’t touch them. So actually, the relationship I think is way worse. And if you think about this, how the Alaska meeting went, quite poorly, how the overall treatment is worsening.
And it’s quite interesting because obviously the Chinese have two very important centenaries: the 100 years of the creation of the Communist Party, which was obviously this July, and then the 100 years of the creation of the Republic, which is in 2049. So, this centenary, on one hand, I would say, “Look, there’s an incredibly important anniversary coming up this summer.” Beijing, I think, will make utterly sure that the markets are stable in China, that we have no turbulence except on any territorial issue.
On Taiwan, this is exactly the wrong year to emphasize, I think, independence or anything that even smells like that. That puts Taiwan into a very interesting position, because with the whole semiconductor shortages, Taiwan’s stock exchange has performed incredibly, Taiwan dollar extremely well. And actually it’s probably one of the hottest places in the world right now. Risk can change dramatically overnight. And, again, in March we saw all this tension and then, basically, China finished it off by sending 20 planes into Taiwan airspace, which is the biggest incursion ever. So I do think that here, Biden on the foreign policy, again also for domestic reasons, will have to show that he’s tough on China. But because of the core topics for him, human rights and environment, are considered internal issues in China, it’s a very different tension to the one between Trump and Beijing.
Current Market Views on Bonds and Equities
Bilal Hafeez (25:42):
Understood. And bigger picture, what’s your bias on the investment side right now? Are you generally constructive on equities and, regionally, which way are you tilted? And bonds-wise, are you bearish?
Bobby Vedral (25:54):
Well, normally I’d be definitely bearish bonds and playing yields higher ever since US was at 90bps. I’m just a bit concerned now about it because everybody is saying that what a bad idea is to be in bonds, but I do think that with all this Biden bazooka, why shouldn’t the 10Y not trade up too? And the risk really becomes once the real rate crosses zero, then it becomes a real problem for real assets. And then, obviously, levels between 280 and 300bps. But again, we had been at 3% in December, 2018, so it’s not that impossible. But those levels, I think, become really then problematic for the 60-40 risk parity portfolios. So, look, strategically, definitely underweight on anything fixed income. Long, anything that the central bank or the government cannot print, so that includes equity, it’s real estate, lands, commodities.
And tactically, I think in April, the seasonality is just too good to be short, to be honest. It tends to be a very strong month, but then, obviously, we come into the good old saying, “Sell in May and go away.” And if you actually look at it, it’s true. Between summer and December, the likelihood is it will trade sideways. So, I do think we might have a bit of a melt-up now, but this is also the time, I think, to put some protection on for the summer. So again, in the core portfolio, we’re long selected equities. But then, we have macro hedges on both for equities and for yields higher. I’m looking to add credit, because credit is definitely, if you look at the US high yield, at all-time lows now, the OIS and the yield levels. And I think there’s definitely something that could be attractive there.
Bilal Hafeez (27:33):
Great. No, that’s an excellent, so we’ve kind of done a whirlwind tour. Now, if people wanted to follow your thoughts and analysis, what’s the best way they can do that?
Bobby Vedral (27:42):
Best way is just go on www.macroeagle.com and just register for the monthly, where I just have my, in very short, my core views. And always very happy for any feedback.
Bilal Hafeez (27:53):
That’s great. And I’ll add the link to the show notes and I’d urge people to sign up for it. I read it every month, whenever you send it out, not only it doesn’t have good views and analysis, it’s also very funny as well. At least you always have a couple of anecdotes towards the end, which definitely makes it an enjoyable read.
Bobby Vedral (28:09):
Perfect. Well, thank you so much, Bilal.
Bilal Hafeez (28:11):
Great pleasure. Thanks a lot.
Bobby Vedral (28:13):
Okay.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)