As The Tri Polar World Turns: The Shape of Things To Come

We distill 6600 words & 33 charts/tables from 25 unique sources into 1460 words - a 4 minute read!

Exec Summary

We had the opportunity to guest host BTV’s Surveillance show this past Monday & as usual it really helped clarify our thinking – especially as it pertains to the shape of things to come.

Our ST, positive, tactical POV has become consensus – that’s ok – its how markets work. We want to stay relentlessly focused forward and challenge ourselves to look into the out years while listening to markets not the vox populi. 

As we do so, we are struck by the parallels between our 2023-2027 outlook & our 1995-1999 US analogue. Solid growth & BTE productivity gains lead to real wage growth and moderate inflation together with good risk asset returns.

We expect the same in the coming years except this time it will global as our Tri Polar World thesis of regional integration in Europe, Asia and the Americas manifests, driven by each region’s need to invest in post Covid, Climate, Conflict and AI related spending.

We view this as a much more stable global operating system – a 3 legged stool underpinned by a synchronized global rate cutting cycle, abundant global liquidity and sustained earnings & stock buyback growth.

As our 4 for 24 macro surprises continue to unfold we expect to see the ROW narrow the growth gap with the US which has been the clear growth leader post Covid. Growth signals are picking up across both Asia and Europe. This should lead to USD weakness.

We see two big opportunities for this longer time frame. One is Commodities which should benefit from both supply constraints due to a period of underinvestment coupled with a demand pick up courtesy of an early cycle global economic recovery.

With Commodities trading at 50 year lows vs stocks we think the recent sharp up moves in uranium, oil, gold and copper represent early innings. We remain overweight in our Global Multi Asset (GMA) model.

The 2nd opportunity lies in EM assets, both debt and equity, which historically do well in periods of solid global growth. Much like commodities these assets trade at historic lows vs US assets.

We are particularly keen on China tech as we see a sharp tech stack divide opening up between US & China tech with Chinese companies dominating their market as time passes. That’s 1.4B people in an economy growing at 5% pa with an E Commerce market that is 2x the size of the US and 10x the size of Japan.

These assets trade at roughly a 70% discount to their US peers with Alibaba and Tencent trading at 8x and 14x forward E respectively. Cash cows like their US cousins, both are buying back stock aggressively.

The risk is that the Fed overplays its hands and cuts rates too fast, causing the long end to blow out and stocks to sink. Alternatively, former Pres. Trump wins reelection and imposes draconian tariffs on China causing even the cheapest Chinese stocks to sink. Plausible? Yes. Probable? No.

CLIMATE

Clean energy joins tech on the central battlefield between US, EU and Chinese producers. From renewables to EVs how Europe & the US will meet their climate goals while not ceding the space to Chinese companies is one of the main areas to focus on in the years ahead.

It’s going to be a battle. Trivium notes that average prices for Chinese solar exports are now more than 40% lower than a year ago. BYD, the leading Chinese EV maker, is also starting to eat into EU and US auto maker shares as it prices EVs on par with ICE autos.

The tech stack & clean energy producer fights are two of the main cutting edge debates slicing right across the TPW.

ECONOMICS

Our focus today is on the first stirrings of a global manufacturing up cycle. With both Chinese and American Manuf PMIs back above 50 for the first time in years this ties in well with our positive multi year, blue sky outlook.

We also note the growing signs of a productivity pick up as fully employed labor forces and demographic changes lead companies to focus on achieving maximum output.

We tie this into a US wealth surge from record home and stock prices coupled with record household savings in a still diffident Chinese consumer base to suggest that a global inventory restocking cycle could keep things humming for some time.

The economic shape of things to come could well be a period of solid global growth & moderate inflation keep in check by productivity gains which also serve to support corporate margins and hence profitability, earnings and risk assets.

POLITICS

The US Presidential election remains the main game in town. We stand by our view that President Biden wins reelection in a landslide.

Electoral uncertainty does however spread far and wide. In Europe the question of how to support Ukraine and worries about what former Pres. Trump might do in regards to NATO should he return to office have led to discussions on joint EU borrowing to fund defense spending coupled with significant NATO expansion of both countries and responsibilities.

In SE Asia, recent polling suggests that China is becoming more of a political role model than the US. While China is clearly the economic power in the region, the idea that its political model is seen as more attractive than the American one is an eye opener.

POLICY

We have noted how fiscal has taken over as the main policy tool after years of monetary dominance. Crescat has a great chart (one of the 33) noting how the US infrastructure push under Pres. Biden is roughly 6x larger in real terms that the Eisenhower Highway program of the 1950s.

Going forward however we think the US fiscal push is likely to ebb while it should pick up in Europe and Asia. In Europe the bulk of the approved Climate spending has yet to be spent and should further support the Southern countries which are already outperforming Germany.

Japan looks to be making headway in providing real wage gains to sustain inflation while China pushes ahead with its plans to dominate its clean energy and tech spaces while controlling the RE slowdown and boosting consumption. Should it bring fiscal policy to play in this regard that could be a game changer.

MARKETS

We remain positive on risk assets (OW Equity & Comm, UW FI) as we have since summer 2022. We want to remain involved with both the leaders like US tech/cyclicals and the laggards such as US Small Caps which typically OP post ISM break outs.

Outside the US we remain well exposed to Japanese and European equity but focus our new money attention on EM, including the China opportunity we noted above. China is testing resistance levels across its markets (KWEB, MCHI, CSI 300); should it break out, we expect it to lead EM equity higher.

Our EM TPW integration plays, Mexico and Poland, remain attractive as does Brazil which represents a catch up opportunity having lagged of late.

We have discussed our commodity OW for some time. We note that over the most recent period COPX and XLE were among the top performers in the GMA while COPX was second only to Cannabis in the TPW 20 model performance.

We believe USD weakness could catalyze another leg higher in both EM assets and Commodities. We note speculators are very long the dollar (most since 2022) and observe that the rate back up this past week did not provide any upward impetus for DXY – the shape of things to come?

We remain deeply UW fixed income, especially DM sovereigns, including UST. We don’t see the case for the long end especially given that the Fed model suggests bonds expect a 60% chance of recession. What happens when that’s priced out?

We prefer Credit (HY) in both the US and EM. We also hold our EM local currency debt position which has yet to work given the stronger than expected USD. We expect it will do shortly.

We also remain with select positions in some of the fintech, biotech, robotics, cyber and other thematic spaces that have been building big bases over the past few years. We think there is a decent shot that the shape of things to come could include that old trading adage: the wider the base, the higher in space.

Enjoy this BTV podcast of my opening segment. It is 12 minutes of solid back and forth between me & the co anchors and represents some of the best TV work I think I have ever done. https://www.bloomberg.com/news/audio/2024-04-01/bloomberg-surveillance-tv-april-1-2024?sref=ftskAWJe