As The Tri Polar World Turns: An Ode To Competition

1234 words – a 3.5 minute read.

Its football season so a tribute to competition, competition between Tri Polar regions, nation states, businesses, investors etc., seems timely. At TPW Advisory, we believe that competition is a good thing. 

Please enjoy the personal story up front & then dig in to the 6500 word Monthly, replete with 28 charts & tables from over 20 different research sources.

We view AI’s emergence coupled with the acceleration of EV adoption as suggesting two firsts – the first competition of the Tri Polar World (TPW) and the first competition of the AI age. Both suggest those regions able to integrate semi and EV supply chains at speed will be the winners. See Chart 2.

All three TPW poles (Europe, Asia & the Americas) are highly motivated to compete, arguably there is no future without success and so we foresee a public – private investment period akin to the post WW 2 rebuild of Europe & Asia but focused on Climate & AI – a perspective which underpins our positive LT global growth outlook. See Chart 20.

Several insights pepper the monthly – one being how China and the US are essentially switching strategies. The US is turning to fiscal/Industrial policy, Bidenomics to catch up to China in Climate & wall off AI while China seeks to shift its growth model from FAI and export led growth to domestic demand and consumption driven growth.

A second insight is how the US leads in AI & China leads in Climate while Europe struggles to shift from its role as a Tech regulator and Climate rule maker to a player in both spaces. The region best able to marry fiscal and monetary policy, public & private investment, will win.

We conclude that our outlook for a new high nominal growth world led by regional integration across EV and semi supply chains and supported by a global cap ex boom to deal with the 3 Cs of Covid, Climate & Conflict is valid. Our analogue remains the US in 2nd H of the 1990s, only this tie its global. See Chart 5.

In the competition for asset allocation dollars, we maintain our fully invested stance with OWs in Equity and Commodities while deeply UW Bonds. We use healthy pullbacks to expand positioning in EM debt & equity and the Commodity space. Our FI positions revolve around fixed rate credit, not floating, while we invest across the commodity spectrum. See Chart 6.

CLIMATE

July has been reported as the earth’s hottest month in over 100,000 years – need we say more?

The IEA estimates the global market for large scale clean energy tech will be worth 600B Euros pa by 2030 – the competition to win that business will drive acceleration of clean energy solutions.

EVs are where competition is most visible today with Chinese companies like BYD winning at home and extending their reach into Europe, forcing last gen ICE winners like VW and Mercedes into an aggressive catch up. See Chart 9.

ECONOMICS

The main competition has been one of ideas – whether or not a US recession was likely; thankfully the no recession camp seems to have won.

A side debate has been over how much inflation’s fall is due to Fed rate hikes versus the ebbing of unprecedented supply shocks. We favor the latter rationale and note the key implications of fixed rate vs floating debt. 

Our forward focus is twofold – on China’ effort to switch growth strategies and stimulate domestic consumption which we see as a matter of confidence and thus time together with our expectation for a global manufacturing rebound in the 2H of the year.

The production cycle is shifting from destocking to restocking – both in terms of manufactured goods as well as primary commodities. Straws in the wind: ISM new orders, US trucking data, S Korean export orders, German new orders all suggest we are on the cusp of a turn. See Chart 14.

POLITICS

It’s all about the US presidential campaign between Pres. Joe Biden who has had an enviable two year track record of achievement vs Republican front runner and former President Trump who is collecting indictments almost as fast as he is collecting legal bills.

Pres. Biden has one of the lowest misery index readings (inflation + unemployment) in modern history & yet somehow in today’s fake news and alternative reality the two men are tied in current polls. What a world.

POLICY

The policy space is where the global competition is most visible – from Monetary to Fiscal Policy, from the US adopting its New Industrial Policy to China seeking to boost its domestic demand it’s all happening right here.

Govts are going to be key actors in the years ahead as Central Banks, the dominant policy players since the GFC, finally recede into the background, even in Japan as the BOJ defeats deflation and moves off YCC. Europe will be challenged to integrate fiscal policy at the regional level.

Monetary policy is shifting from an uber aggressive rate hiking cycle to an EM led rate cut cycle. The big news this week was not the long end of UST breaking down but rather Chile and Brazil both cutting rates – the beginning of what we expect to be 300-400 bps of cuts for each in the coming year. See Chart 16.

Fiscal policy is being brought to bear across the globe – one wonders what role it will play in the US beyond what is already done given interest expense is passing the DOD budget in terms of annual spending. See Chart 17.

There are growing calls to bring fiscal policy to bear in both China and Japan. In China, the call is to leverage the central Govt which has plenty of fiscal space to boost consumption. In Japan, the call is to think thru the proper fiscal policy in a world of sustainable Japanese inflation.

MARKETS

No recession has led many Wall St vets to recast their YE calls for the S&P with some of the biggest bears throwing in the towel. That of course set the stage for a nice little pothole week with healthy pullbacks across risk assets.

Given the strong start to the year and the weak August – September seasonality, a period of digestion is a heathy and normal part of the market cycle. 

We would use such pullbacks to build positions in our favored areas for the 2H, namely EM equity markets like Brazil and China coupled with the Commodity space across energy, industrial metals etc.

Q2 earnings are off to a solid start; more importantly, positive US earnings expectations are spiking while 2024 US estimates remain robust pointing to roughly 13% EPS gains next year. See Chart 23.

Our asset allocation competition keeps us invested in both EM local currency debt and US HY as areas of FI opportunity. EM local currency is very under owned by foreign investors while the HY maturity wall is years away. See Charts 25 & 27.

China equity was a big underperformer during the Covid period, down 32% in USD terms vs EM ex China up 32%. China equity now sells at under 11x forward earnings, a 14% discount to broad EM, one of the largest on record. Brazil benefits from a pick up in commodity demand, a reduction in domestic rates and appears to be breaking out. See Chart 28.