As The Tri Polar World Turns: 2025 Outlook - The Long Cycle
1370 words – we distill 6k words & 34 charts from 22 different sources into a 4 minute read.
EXEC SUMMARY
We are excited to present our 2025 outlook which builds off our recent writing.
We believe global cross asset investors enjoy a rare confluence of events beginning with a young adult bull market that offers significant upside as it reaches maturity.
At the same time there are large pockets of the global risk asset space with lots of room to advance. KWEB remains our laggard poster child – it can double and nearly double again before reaching its prior highs set back in 2021 at $102. Importantly KWEB is illustrative not unique as there are many, many segments of the thematic space, the commodity space, the EM equity space that look similar.
The long cycle, what we have previously called our global macro blue sky outlook for 2023 -2027, provides the time & space for this thesis to play out. We want to ground our 2025 outlook in that body of time, a time set that syncs up perfectly with the equity bull market.
Critical to the long cycle is the concept of continuity. Continuity in economics, politics, policy and markets across the Tri Polar World (TPW). We demonstrate this in our Global Risk Nexus (GRN) set up below.
Here’s the thumbnail sketch. The long cycle begins with two powerful underlying trends. First, the strength of the underlying global economy as it withstood an aggressive rate hiking cycle without falling into recession. Second, global equities absorbed a punishing correction to its leadership group of Big Tech, AI, Nvidia and still powered to new ATHs as we moved into rotation not recession.
As we prepare to enter 2025, we have continuity in the global economy with no major imbalances, fully employed populaces enjoying record HH net worth, cashed up corporates and Govts fully aware of the need to invest in AI, Climate & Conflict mitigation.
Political continuity ensures policy continuity which sustains economic continuity. We expect VP Harris to win the Presidency in a landslide thus ensuring US policy continuity. New leadership in the European Commission has 5 years to pull the EU out of its funk. Pres. Xi has determined that China’s export dependency is a national security risk and is likely to go all in on building out the domestic consumption side of the Chinese economy.
Policy continuity is key to sustaining global economic growth. Global monetary policy is set to provide the most synchronized global rate cutting cycle in 40 years according to JPM. Fiscal policy remains a focus of Govts across the TPW as all need to have AI capability, all need to mitigate Climate risk and adopt the new industrial policy mix of public & private cooperation.
All this leads to market continuity & the continuation of the global equity bull market. There is both time & space for the laggards to participate and this is where we want to focus our attention. In the Commodity space, the EM equity space, thematic space (climate, cyber, fintech). We want to buy dips and be opportunistic. The last thing one wants to do in a long cycle, bull market environment is leave early.
CLIMATE
China’s dominance of the clean energy space reveals the power of the modern industrial policy process. The US has responded under the Biden -Harris administration, now it’s Europe’s turn.
Climate change is occurring in real time thereby forcing policy change to occur almost as rapidly. The sudden revilization of the US nuclear power industry as the ideal power source for the AI data center build out is the example du jour.
We note growing signs of bottom like behavior taking place in the renewable energy space from M&A in the lithium space to Chinese solar and battery companies shelving expansion plans and cancelling IPOs. This is the stuff bottoms are made of.
ECONOMICS
Global growth is enjoying an unusual period of stability as the US grows at 3% or so, well above its potential growth rate thank to immigration & productivity. China is growing at close to 5% as it makes a serious shift to drive consumption growth.
Europe faces several challenges, but they are well known. Now it’s a question of political will as the old giants, Germany & France falter while the periphery in both Southern and Eastern Europe lead.
Inflation is unlikely to be an issue next year in either the US or Europe. 2% inflation should be viewed as a floor not a ceiling. China could use some inflation and is likely to get it while Japan has slain the deflation monster.
POLITICS
We expect VP Harris to win in a landslide as former President Trump’s outright lies about the people of Springfield Ohio and FEMA’s response to recent hurricanes cause him to lose the swing states of NC, Georgia and Florida.
It’s 2024 not 2016; eligible Gen Z & Millennial voters have nearly doubled over the past 8 years vs Boomer voters staying flat. See Chart 15.
We disagree with those who fear widespread violence should Trump lose noting that 900 + convictions for crimes committed during the Jan 6th insurrection should provide a healthy deterrent.
Should we be wrong and Trump win we believe his policy mix to be a disaster for the US economy as tariffs and deficits soar along with inflation while the labor market is thrown into confusion. We think the USD could crack in such an environment as foreign money flees the chaos & returns home.
POLICY
We expect 2025 to be a year of policy continuity across the TPW as global monetary policy remains supportive. A slow rate cutting cycle is preferable. Fiscal policy will remain supportive given the amount of spending in the pipeline across both the US and Europe for climate and AI related investments.
China is likely to build on its recent fusillade of policy announcements including direct support for consumption policies.
Europe is the TPW region where policy needs to gain traction post the Draghi report. We are watching the Commerzbank – Intesa tie up and the development of the Capital Markets Union (CMU) as keys to assess Europe’s capacity to sharply boost its investment spending in order to compete with China & the US.
Cash rich corporates enjoying wide open credit markets will continue to invest in productivity driven areas including AI which is fueling a winner take all boardroom mentality across the globe.
MARKETS
And so on to market continuity where its all about the E for earnings.
We like Dr. Ed Yardeni’s S&P 8,000 formulation of 7% or so US EPS pa growth through 2030 puts SPY EPS at $400 coupled with a 20 PE leads to SPY 8,000 by 2030. That’s long cycle thinking and we are here for it!
A long economic, politics and policy cycle is ideal for a long bull market cycle to play out, underpinned by sustained EPS growth.
We expect the fully priced US equity market to return its EPS growth rate in 2025 which presents an ideal set up for ROW outperformance. 3rd year bull returns tend to average mid single digits returns. There are tremendous catch-up opportunities with EM the poster child as it trades at a 50 year relative low to US equity.
We want to buy the laggards in a long cycle environment. EM equity, Commodities, given investor allocations at 7 year lows (BofA), Small Caps & thematics which have been left for dead by most investors.
The USD could be the catalyst for a move into non US equity as foreign investors rebalance homeward as their economies improve, especially in Asia where capital repatriation is starting to become a topic of conversation as the yen carry trade unwinds and China engages its policy engine. A weak dollar is catnip for EM equity & Commodities and is typically what one gets when China equity moves higher.
We remain deeply UW Fixed Income with zero UST exposure. We remain OW equity and Commodities and long US and EM credit. We look to shift more into non US equity as the year progresses. That’s our 2025, long cycle playbook – let’s play ball!