As The Tri Polar World Turns: Enjoy The Downhill!

800 words – a 3 minute read.

Executive Summary

We sense a change in the air – a sense that the old stories of rising prices and case counts, of shortage & disruption have lost their bite & ability to move markets – it’s all in the price.

New stories, of falling prices and smooth delivery systems, a normal holiday season with plenty of inventory, are taking their place. The bearish take seems old, musty, tired – the positive outlook feels new, fresh, wired - the coming thing.

We expect falling macro volatility and a growing sense of stability to support risk assets as 2023 unfolds. Headwinds – inflation, rates, the dollar - turn to tailwinds.

Near term, we remain focused on our 3 keys for the 2ndH – the pace of the US inflation decline, the path of Europe’s energy prices & the success of China’s move off Zero Covid. All three are moving in the right direction.

Longer term, our focus is on continued high nominal growth & the coming global cap ex boom we expect as both Govts & corporates focus on the needs + opportunities inherent in dealing with the 3Cs of Covid, Climate & Conflict. The analogue is the US in 1995-2000, this time its global as our Tri Polar World builds out.

We struggled with the uphill climb of inflation, rates & the USD so enjoy the downhill run – while après ski is more our style the downhill comes to mind when thinking about the positive asset allocation outcomes stemming from falling inflation, declining rates & a weak USD.

A flattish US equity market coupled with a weak USD is the best possible set up for non US equity outperformance. Our model portfolios remain OW & focused on EAFE & EM equity, Small Caps, Value & Cyclicals in the US, HY credit in EM & US & commodities across the complex. Two areas of Focus for 2023 – Climate & Innovation – both bombed out, both candidates to replace Big Tech as the new Growth spots.

CLIMATE

While COP27 was a bit of a disappointment the corporate sector continues to invest heavily.

Investors, distracted by the Fed, Covid & Conflict are missing the upside from the single biggest global macro theme of this decade. The scale of the investment opportunity will become clearer as stability returns.

ECONOMICS

The lack of major imbalances across the consumer, corporate & banking sectors suggest bearish takes on the economy will prove wrong.

The most anticipated recession ever is unlikely to unfold as consensus expects. We remain focused on our Middle Way supported by high nominal growth and expect a cap ex boom to begin to unfold as macro volatility ebbs.

Wage - price spiral fears are overdone – if heavily unionized Germany with double digit inflation settles for wage gains well below inflation its highly unlikely to happen elsewhere.

China is giving up its fast growth crown to SE Asia and India as growth leadership starts to spread. China, recognizing Covid’s negative growth impact, is moving to a light touch model which should unleash cashed up Chinese consumers in 2023.

POLITICS

2023 should be a more stable year in politics across the US, no midterms, Europe, no new wars & China, Pres. Xi has his 3rd term.

Plenty will be written about geo political risk but with limited market impact as Europe decides how it wants to play the US – China split, made very real by the US semiconductor ban. Russia’s invasion has opened a lot of European eyes. Our Tri Polar World thesis keeps clients ahead of the curve.

POLICY

Gradual stability is the watchword here as well – the Fed & ECB will end their rate tightening cycles which should allow parts of EM to begin their rate cutting cycle.

Fiscal policy remains active in Europe, less so in the ROW. Labor policy will assume a bigger role in policy debates as the best job market in 50 years runs into the need to push inflation down to 2% - we expect the job market argument to win but don’t expect to read headlines about it.

MARKETS

Declining macro volatility should be positive for risk assets, especially outside the US.

Flat SPY next year (consensus) + a weak USD (also consensus) = the best set up for non US equity outperformance in some years. We see opportunity across both EAFE & EM, which in many cases are at record cheap levels vs the US while completely under owned.

BTE economic outcomes leads to continued OW of US and EM HY; we remain believers in the secular bull case for commodities and are positioned as such.

As stability returns, we expect animal spirits to revive and see the Climate & Innovation spaces as areas of opportunity to replace Big Tech as the search for growth continues.

Enjoy todays OETV video interview where we walk through the above.