Jun 26, 2017, 4:52 PM ETPanel, Conference Presentation

Part 2: Global Capital Markets

Markets have gained in double digits since the election, driven by "animal spirits" and a perceived shift toward reflationary policies, though conviction has slightly muted as legislative complexities emerge.
David Solomon (Goldman Sachs) notes that while the market correctly priced in the initial policy direction, the transition from announcements to enacted legislation introduces new volatility and requires delivery on promises.
Mohamed El-Erian warns that the market has priced in significant optimism; failure to deliver concrete tax reform or healthcare progress before year-end could trigger a loss of confidence in the administration's ability to execute.
Thomas Fink (Barings) highlights that while the outlook is positive, the market must reconcile contradictions between strong stock performance, weak GDP data (0.7%), low bond yields, and geopolitical risks like North Korea and European instability.
Scott Miner (Guggenheim) cautions that while CEO confidence is at 2004 highs, the expansion cycle is late-stage, with credit spreads at record lows, particularly in high-grade corporate debt, necessitating a defensive posture regarding credit risk.

The panel agrees that tax reform is essential for growth, specifically citing the simplification of the corporate tax structure, repatriation of offshore cash, and a reduction of the corporate tax rate to approximately 15%.
A significant challenge identified is the political difficulty of balancing revenue neutrality with tax cuts, requiring complex compromises within the reconciliation process.
David Solomon and Arunma Otec emphasize that deregulation aims to remove "headwinds" from post-2008 regulations without compromising systemic safety and soundness.
Specific regulatory targets mentioned include amending the Volcker Rule to enhance market liquidity and reforming GSEs to restart private mortgage markets.
Scott Miner notes that the current regulatory framework has inadvertently shifted capital allocation away from banks (due to capital requirements) toward institutional investors in alternative assets like infrastructure and emerging markets.
Arunma Otec argues that successful deregulation requires high economic growth to provide a safety buffer, preventing the need to worry about another financial crisis.

Arunma Otec (World Bank) asserts that the US economy drives global growth, with potential infrastructure investment adding up to 2% to GDP in developing nations, citing historical examples like the Japanese bullet train.
The panel discusses the potential for US growth to reach 3-4%, though this is tempered by the need for productivity enhancements beyond just infrastructure and tax cuts.
Mohamed El-Erian and Scott Miner suggest that the US cannot afford a significantly stronger dollar, necessitating coordinated growth efforts with Europe to prevent the dollar from becoming a trade headwind.
Thomas Fink contrasts the current dollar strength with the Reagan-era Plaza Accord, suggesting that focusing on US economic fundamentals rather than managing the currency value directly may be the superior strategy.
David Solomon notes that while the geopolitical landscape is fragile, global growth sentiment has improved over the last 24 months compared to 2015-2016, driven by stabilizing factors in China and unexpected resilience in Europe.
Scott Miner highlights a "flight to safety" dynamic where the dollar remains strong due to global uncertainty (Brexit, French/German elections), but expects this to correct as Europe stabilizes.

Institutional investors are actively seeking yield in a low-rate environment, driving capital flows into risk assets, infrastructure debt, and emerging markets (EM) from Europe and Japan.
Emerging Markets are viewed as attractive for diversification despite private debt accumulation, particularly for those willing to navigate local political risks, with the World Bank offering de-risking partnerships.
Thomas Fink reports that capital allocation is shifting toward yield-rich areas like high-yield bonds and asset-backed securities to compensate for the difficulty of generating returns in safe assets.
Scott Miner warns against forcing risk into portfolios solely for yield, noting that double-B corporate bonds yielding 4.5% offer a compromise between risk and return compared to equities.
Mohamed El-Erian advises a tactical approach to EM and Europe, suggesting these regions are lagging the US rally and may offer better entry points for risk capital if valuations align.
Arunma Otec states the World Bank remains neutral to benchmark on its dollar book due to the high frequency of global surprises, maintaining a defensive posture until clarity emerges.

The panel identifies technology as the primary disruptive force affecting all industries, from retail (Amazon) to manufacturing, forcing businesses to fundamentally rethink their operating models and supply chains.
Thomas Fink points out that while AI and blockchain offer efficiency gains, they pose significant challenges for developing nations regarding the "digital divide" and the potential loss of low-wage jobs to automation.
Scott Miner emphasizes the critical need for education reform to prepare the workforce for future jobs created by robotics and AI, warning that current educational systems are ill-equipped for this transition.
Mohamed El-Erian notes that developing countries have the opportunity to "leapfrog" infrastructure stages through mobile technology, similar to the past 20 years of telecom development.
Industries expected to benefit most from the administration's policies include financial services and manufacturing, driven by tax reductions and deregulation.
David Solomon highlights that while supply chains are global and complex, policy shifts like border adjustment taxes would require years to rebuild and could create significant distortions if implemented without global coordination.