With part of the narrative of the upcoming U.S. presidential election focused on the sizable segment of society who feel they haven’t benefited from the wealth created by globalization, it fosters discussion on how to grow the economy and bring more people along for the ride.

A trio of top-level economists and money managers weighed in on this and other matters on Tuesday at the Seventh Annual Inside Alternatives investment conference in Denver sponsored by Financial Advisor and Private Wealth magazines.

“The economy is like a pie, so are we focused on simply growing that pie regardless of where that pie grows?” asked Ali Motamed, founder and managing partner at Invenomic Capital, who in 2014 was Morningstar’s top alternative fund manager as co-manager of the Boston Partners Long/Short Equity fund. “What you’re seeing in a lot of cases is you’re driving growth and productivity, but there’s a huge class of society that’s being left behind. So now we have to figure out how to reallocate, and that’s where it becomes difficult.

“And I think the other problem you have is it leads to political instability,” he continued. “If the average person is unhappy you create political instability, which makes for a riskier environment. We have to balance that. Do we want to grow the pie, or do we want to make sure everyone gets their fairs share of the pie.”

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., posited that taxing the wealthiest of the wealthy might spread the wealth and put more money into the pockets of people, which could accelerate consumer spending.

“I guess one way to think about it is Robin Hood,” Rosenberg said. “We have to get income, and I’d say use taxes to get income from the hands of people who aren’t going to feel it, and get it into the hands of people who spend a large percent of their income. And that will re-widen the middle class at the same time.”

He acknowledged that other things need to be done simultaneously to bolster economic growth: creating work incentives; addressing the skills shortage and, in a related matter, crafting better immigration policies; and graduating more people in the sciences and engineering fields.

“I do think there should be a total re-write of the tax system,” Rosenberg said, adding that while reworking corporate taxes wouldn’t be difficult, it would be more complicated with personal income taxes. But if this happens, he said, “you’ll see the economic numbers start to revive more substantially.”

Go Long On India, Short On Europe

Among other topics addressed during the discussion, panelists offered their take on the current economic/investment environment. Harindra de Silva, president and portfolio manager at Analytic Investors LLC, sub-advisor to the 361 Capital Long/Short Equity Equity Fund, said now is a great time to place negative bets, or shorting positions, on Europe.

“From a micro standpoint, Europe presents one of the best shorting opportunities I’ve seen in the past 10 years in terms of valuations and negative momentum,” he said. He wasn’t talking about the large multi-nationals such as Unilever or Nestlé, but more about companies that operate regionally and are more susceptible to another Brexit scenario or other bad news. 

“Europe hasn’t done a good job cleaning up after the financial crisis,” de Silva said. “There’s a lot of overhang that needs to be cleaned up.”    

de Silva’s fund is levered on the short side. From a sector standpoint, he has a big underweight in financials and a big overweight in consumer staples. And he says he has a pretty strong tilt towards North America because that’s where the greatest earnings stability is.

“It’s hard to build a value-tilted portfolio now, which is why I think there’s a lot of opportunity on the short side,” he said.

Regarding Europe, Motamed smells a European banking crisis brewing on the horizon that could be triggered by future European elections that pull the E.U. apart and/or from troubled European banks that suffer major problems and bring down others in a contagion effect.

And then there’s Brexit. Rosenberg believes there will be so many legal obstacles to carrying out Brexit—i.e., myriad treaty renegotiations and the like—that it could drag out for years. He’s skeptical the U.K. will pull off a pure exit from the E.U.

“It’s the overhang and uncertainty of Brexit, along with concerns over bank capital structures, immigrations problems and political uncertainty . . . Europe will remain a drag on global growth as far as the eye can see,” Rosenberg said. “I don’t see what the upside is. If you’d ask me what are the things in the world that are at the top of my worry list, Europe is at the very top.”   

On the positive side, Rosenberg likes two countries from the Bric complex.

“India is the world’s seventh-largest economy, and will be the third-largest in the next 10 years,” he said. “You have to look at India as where China was 20 years ago. There are some liquidity issues, but they do have the best demographics, and they’ll be a source of global growth for at least the next decade.

Brazil, where the Bovespa is up 30 percent this year, “is a real turnaround story,” he added. “When you look at emerging markets, it’s what’s happening to their balance of payments [that’s key] because that’s what caused their crisis to begin with. And Brazil's current account deficit is melting, so they remain a good turnaround story.”

Turning to the U.S., Rosenberg said that no matter who wins the November election it will result in more infrastructure spending because both Hillary Clinton and Donald Trump have made it a priority. That would be good news for capital spending—machinery, cement, steel.

“And they’re both hawkish on defense policy, so aerospace and defense will be good places to be no matter who wins post-November,” he said.

Rosenberg’s favorite investment idea is Canadian banks. He noted they’re providing a 4 percent yield and are growing their dividends; are past the worst of the loan losses from the slowdown in the energy patch; U.S. hedge funds have record short positions on them; and they’re trading at low valuations on a historical basis. In addition, they’re very regulated, safe institutions, and he believes they potentially offer 3 percent to 4 percent annual price appreciation.

“Hedge funds had a winning short trade last year during the worst of the energy-related loan losses,” Rosenberg explained. “The problem is when you short a stock yielding 4 percent you’re going to have that negative carry. I think that trade is over. If those shorts close their positions you’ll see a big increase in stock prices. These banks normally trade at two times book value, but now are trading one-and-a-half times book.”

That said, he added, the fly in the ointment for Canadian banks is that the country’s residential real estate market is in bubble territory—especially in Toronto and Vancouver. That could fester into loan losses if the real estate market tumbles, which is why hedge funds continue to short Canadian banks.