As The Tri Polar World Turns: The Age of Investment

Exec Summary – We distill 7400 words, 34 charts & tables from 25 unique sources into 1350 words & a 4 minute read. Full Monty attached & well worth the time – we break new ground.

We focus on public & private investments – in AI, EVs, semi fab plants, copper mines etc. in all three Tri Polar World (TPW) regions & in virtually every country on the planet.

The penny dropped during several of the Magnificent 7 earnings calls where the companies detailed absolutely massive spending plans – roughly $45B a piece for Alphabet & Meta in what analysts said was a strategy to “spend like crazy” now to “monetize like crazy” later.

Concurrently came reports from firms like MS and JPM of a looming copper shortage – a shortage made worse by burgeoning power needs, needs stimulated by power hungry data centers running AI compute.

These twin realities, public & private investments on a massive scale in both the digital & physical realms underpins both our global outlook and our model portfolio positioning. We view this Monthly in particular as emblematic of TPWA work: forward looking, global, thematic & model centric.

The Age of Investment reinforces our blue sky global macro outlook for the 2023-2027 period & builds off our 4 for 24 global macro surprises. It’s twin engine investment sourcing (cash rich companies & Govt money printing machines) coupled with the existential nature of the climate, AI, supply chain, defense etc. needs,  paves the blue sky runway. Full stop.

This is the competitive landscape for our three TPW regions; Asia, Europe & the Americas. The stakes are high -whoever gets it right will dominate the coming decades. Hi stakes ensure trend support.

Immigration will become an important marker of success as shrinking working age populations drives productivity. A key competitive advantage will accrue to whoever can pivot from immigration as curse to a must have.

From a model portfolio investment POV we want to be close to the ground in both the digital and physical spaces – put simply we want to own the picks & shovels.

We see semiconductors as the pick & shovel of the AI Age. We see the miners as the pick & shovel of the physical realm, copper miners, uranium miners, gold miners.

We are watching two catalysts – one for each realm. On the digital side we remain convicted with our 2 tech stack divide thesis whereby China and the US ringfence their respective tech stacks. The investment implication being that China tech will dominate China and US tech the US.

We see China tech as the big opportunity and have highlighted KWEB for the past several months. China’s ecommerce market is 2x the size of the US,  growing twice as fast. It’s dominant companies sell at massive discounts to their US counterparts. KWEB, up 30% on both an absolute and relative to XLK basis over the past 3 months, is just getting going.

The 2nd catalyst is USD weakness. We don’t subscribe to the dollar “wrecking ball” thesis. We note momentum driven markets and wonder if the $/Yen at 156 could join Tech, TLT, Copper, Cocoa etc. as the next big mover – we note the net short Yen position at 15 yr. highs and Yen FV some 35% lower.

Peak inflation fears ( did we just hit it), ECB rate cuts taken as pro growth & pro Euro, worries about a 2nd Trump term, all could be catalysts for USD weakness. Such weakness would give the Commodity complex a leg up as well as providing support to EM assets.

We remain OW Equity, Commodities and UW FI.

CLIMATE

China’s dominant position in the clean energy space is beginning to be recognized and reacted to. Well integrated supply chains, rapid innovation and government support suggest such dominance is unlikely to be successfully challenged.

The Q is what is the US & EU response? Their main goals are conflicted – one to meet Climate targets and two to ensure domestic producers are involved. To meet goal #1 suggests depending on Chinese players which defeats objective #2.

We expect a hybrid approach with US – EU tariffs to support local players which in turn lead to Chinese companies producing locally ( China net offshore investment at an 8 yr. high).

All this of courses reinforces the Investment Age.

ECONOMICS

Fully employed populaces driving consumption while cash rich companies and policy driven Govts invest to become AI and Climate players underpin our early cycle global economic recovery thesis.

We remain focused forward and not sweating every data point and data release. Our main theme is clear and being reinforced by major factors. So US Q1 GPD miss doesn’t lead us to sell, nor does a slightly hotter CPI print.

We remain happy to trade rate cut hopes for earnings growth & agree with the Fed chair who sees neither “stag” nor “flation”.

We highlight work from BofA’s Global Proprietary Signals (GPS) in support of our early cycle thesis

POLITICS

Notwithstanding India’s massive election campaign or Mexico’s likely election of its first female President the focus grows on the US Presidential election both from a political campaign & policy perspective.

In both instances, it’s like night and day between Biden and Trump.  Biden is a continuation; Trump has made his 2nd term goals quite clear in recent interviews with Time magazine etc. Massive roundups, immunity for police, retribution campaigns against enemies real and imagined, a dictatorship that he thinks Americans will like. Erect huge tariff walls & punish those who question dollar hegemony round out the Trump mix.

We expect a Biden landslide and note the potential for a Democrat sweep. We include a JPM poll taken at the recent IMF meetings where 70% expected a divided Congress and only 12% saw US political risk as a top threat to markets.

POLICY

Monetary Policy continues to give way to fiscal policy in an age of investment. Worries over fiscal deficits are misplaced – fiscal has a long fuse and a slow burn. It will not interrupt our 2023-2027 outlook as the existential nature of the challenges facing Govts will prevail.

These spending plans – the bulk of which will be spent this year and next in both the US and Europe, pave the runway for our blue sky global macro thinking.

Each region has major policy challenges- Europe needs to integrate faster and leverage its scale rather than be hobbled by it. Asia, led by China, needs to restores its internal supply demand imbalance, especial in the Chinese context – watch for the upcoming Third Plenum.

The Americas needs to stabilize its politics (US),  better utilize its manpower and integrate South America into the North American sphere.

MARKETS

Within our Equity OW we focus on pick & shovel tech, Cyclical US sectors, Small caps, EAFE exposure, China tech as noted and TPW EM exposure.

We are the early stages of an earnings upcycle that will support global equities & note double digit EPS growth forecast for US equities this year, 2024 and 2025.

Our Commodity exposure has been a great hedge to recent equity weakness – we remain OW and exposed across the complex.

Our FI allocation remains deeply UW and completely out of DM sovereign exposure. We prefer credit risk given our growth outlook and note considerable OP vs BM by our US HY position. While our loc currency EM debt position has suffered from some USD strength we expect that to change in coming months. Our Asian HY position has likewise OPed AGG; we see considerable room for further performance there.

The dollar remains a big focus; it could be the key to unlock another leg of Commodity OP coupled with helping EM equity break out.

From a thematic POV we note that should we reach peak US inflation fear coupled with peak rates and peak USD that could well set up the broad thematic space. We note pockets of performance like BTC a few months ago or Cannabis more recently. Future tech (fintech, gamming, cyber, robotics) has done ok while Climate/clean energy has continued to suffer from the competitive landscape.

 For those who like video: enjoy this Schwab TV clip from Monday’s hit from the NYSE floor. https://schwabnetwork.com/video/how-china-s-economic-rebound-will-impact-u-s-mega-caps