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 Capital Group

Politics and markets always interact. The role of the political economist is to pick apart the controversies and uncertainties and create a framework to address them. Talha Khan is one of three political economists at Capital Group, with a focus on Europe, the Middle East as well as broader geopolitical issues.

What is your role?

Political economists are part of the Capital Strategy Research (CSR) group, which also includes macro economists and accounting specialists. We have autonomous roles and focus on different regions but come together as a think tank that combines competencies as needed to deal with specific issues. I mostly focus on reacting to immediate world events but a quarter of my time is dedicated to longer term thematic issues, such as the evolving landscape of the Middle East, the future of the European Union (EU), how climate change will impact the economic policy agenda, and so on. For each of these, I try to understand key stakeholders, meet policy makers, and develop mutually beneficial relationships. As long-term investors, our incentives are aligned with policy makers; we offer patient capital, carry out in-depth analysis, provide counsel, and of course confidentiality.

How has the role of a political economist at Capital Group evolved over time? Why is it important?

For many years, politics was not a focus, but the global financial crisis changed that; thereafter markets could no longer ignore politics. The role sprung from the uncertainty surrounding the eurozone crisis in 2011-2012. Many questions – encompassing the political economy of the European monetary union – were being asked and while there were many opinions, these were often devoid of facts. Capital Group assessed that it would be worth investing in a role that provides objective, dispassionate, framework-based analysis to anchor internal discussions and put more considered thought into the future of the eurozone, and other issues that were likely to emerge in its wake.

Since 2012, from Russia’s invasion and subsequent annexation of Crimea in 2014 to the European migration crisis of 2015, the watershed vote for Brexit and the election of Donald Trump in 2016, there has been no shortage of market-relevant issues and events that we’ve had to contend with; uncertainty and volatility are just a part of life. We are starting to do a lot more scenario analysis, developing frameworks to understand inherently complex issues with no linear solution, to appreciate their multi-dimensional aspects. We imagine various plausible outcomes for the future and the potential market implications. Most recently, I led a scenario analysis on the post-pandemic world: the key axes of uncertainty that are going to drive the future of societies in a political economy context and what that means, driving it down to macro and investment implications.

How do your views impact portfolio management at Capital Group?

Capital Group focuses on bottom-up fundamental securities research coupled with a top-down overlay. The CSR group that I belong to is an independent internal strategy research group that provides the macro overlay that gives managers a sense of the environment in which some of the companies they are investing in operate. We provide aggregated research to Capital Group’s five investment groups covering fixed income, equities and solutions. We sit with our portfolio managers and are very much part of the team. We have views but don’t manage portfolios so we are not anchored to portfolio views, which is a big advantage in that it encourages intellectual independence and the space to communicate views that may be counter to what our portfolios reflect at the time.

There is no house view: our individual views form a mosaic of research inputs that get collected to form a melting pot of ideas. It’s about following the process, bringing together different views, to avoid herd mentality and stacking risks in our portfolios. The Capital System has multiple portfolio counsellors with many managers per fund, who each express their own convictions and act on them in their portfolio holdings. The process of how the macro research transfers to the funds is one of osmosis, whereby we engage in internal research calls to share our insights or react to macro developments that may impact asset prices.

What are your views for 2021?

2021 is a year of transition for the EU as it recovers from COVID-19, probably the greatest crisis that it has faced. While the mistakes made during the vaccine rollout might delay the economic and health recovery, the combination of the EU Recovery Fund, accommodative fiscal policies at national level, and the European Central Bank’s (ECB) continued monetary policy backstop should hopefully provide enough support for Europe to emerge relatively unscathed from the pandemic. The greatest challenge is to address the very real risk of divergence between various Eurozone economies. This point will be extremely politically contentious, at a time when the Franco-German engine that is an important anchor for Europe is largely distracted by national elections over the coming year. This means that key policy debates on how to address the post-pandemic economic landscape may stall, providing populists with an opportunity to exploit grievances. Over the medium term, I worry about how deep the socioeconomic scarring caused by COVID-19 may be and the widening imbalances both within and between countries that are heavily exposed to the sectors most affected by the pandemic (e.g. hospitality and retail).

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