As The Tri Polar World Turns: Short vs Long Term Investment Thinking

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Executive Summary

As Narrative Speed turns investors into contortionists it seems like a good time to consider short term vs long term investment thinking.

Most investment money is LT: pensions, endowments, 401Ks, target date funds etc. Significant amounts are managed on a short term trading basis – often by machines.

Unless one has a real edge we don’t see ST trading as viable over the long term. Rather this type of investor often provides liquidity and price discovery for the LT investor.

Recent trading gyrations – from oversold last Fall to overbought post January and now oversold again – suggests LT investors don’t need to chase & can wait for the right opportunity.

We think the current environment provides that opportunity across a number of sectors (biotech, homebuilders) and markets (China, Japan). We see the dash for cash as a trap & instead want to extend out on the risk curve.

As our LT outlook – high nominal growth world underpinned by a global cap ex boom to deal with 3Cs of Covid, Climate & Conflict unfolds, we want to do two things: one, avoid being shaken out of our positions by ST market gyrations and two, maintain conviction even in foggy weather.

Check out our global macro lightning round and 21 charts from 15 sources in the full doc below.

CLIMATE

Our view of climate as the world’s single biggest global macro theme of this decade is starting to play out. As Covid ebbs the focus on climate mitigation grows as countries lay out plans and money (IRA in US, ReNuEU in Europe, Japan’s nuclear revival & China’s EV push) to address the challenge.

As LT investors we want to be exposed to the entire climate mitigation chain – the beauty of the ETF space is that it provides just that across the twin segments of transportation & power generation.

Climate represents the interplay between short and long term investment thinking; we want to use short term dislocation to build long term allocations, especially now as the effort shifts from political talking points to industrial scale execution.

ECONOMICS

Conviction in our no recession view grows stronger as US housing and manufacturing looks to bottom, Global Manufacturing PMIs break back above 50 & service led Composite PMIs in Europe, Japan and China recover the 50 level.

G4 Central Bank liquidity provision helps as does record low UER across the DM.

Sticky inflation worries across the US and Europe likely a function in part of warmer than expected weather; consensus US inflation for Feb & March, if met, would bring inflation down to 4.7% y/y by end of Q1 vs FFR likely to be around 4.9% by then.

The onus is shifting to the bears to validate their case before time runs out; Barclays expects US Manuf PMIs to be back at 53 by YE; Natl Assoc of Realtors sees US housing bottoming this Q. China’s recovery is surging with property prices bottoming & mobility indicators nearing 2019 levels.

POLITICS

The 3Cs of Covid, Climate & Conflict continue to drive global politics from China’s Covid about face to the US focus on climate implementation & Europe’s impressive ability to grow in the face of the Russian invasion of Ukraine.

It seems Pres. Biden will spend the next 2 years cutting project ribbons from the Chips, IRA and Infraturure Acts while EU head von der Leyen pushes for Europe to do the same.

We do not share the view that China’s Pres. Xi is unpopular or weakened by the Covid about face – rather we expect a strong domestic demand led economic recovery to lead to political popularity – much as it does elsewhere.

POLICY

Huge changes are underway across the policy landscape: from the end of the most aggressive global rate hike cycle in decades to the return of US Industrial policy & on to Japan’s return to nuclear power & China’s domestic demand led go for growth strategy. It really IS different this time.

We expect the Fed to go on hold by mid year, the ECB to follow soon after while the BOJ under new leadership considers how to move off YCC. Once the Fed pauses, we expect EM Central Banks to begin a new rate cutting cycle.

These rate cuts will seed a new global growth cycle jumpstarted by China and underpinned by the global cap ex cycle we have spoken so much about for so long.

Policy in the US and Europe has been for the most part already decided – we note the growing acceptance of a higher than 2% US inflation target. We now move into the execution phase which should allow us as investors to identify those sectors/companies benefitting the most from public investment crowding in private capital.

MARKETS

We expect this new policy mix to favor the losers of the past decade – value vs growth, non US vs US, EM vs DM, physical vs digital, Commodities vs Bonds etc.

We see the dash for cash as a mistake – much as we view The Year of The Bond call as a mistake. No recession means no rate cuts means limited bond upside.

Yes, one can earn 5% for cash but what about the forgone opportunities of doing so. We highlight banks as our preferred beneficiary and way to play ZIRP’s end. We note that EUFN, a core holding, is up roughly 17% over the past three months while cash is up less than 1%.

Europe leads the way for global equities as it breaks out while Industrials does the same sectorally. We remain OW both together with non US vs US & Cyclicals, Value and Small Caps. US homebuilders remain appealing given the bottoming process.

We continue to focus in on China and Japan and note with interest a recent UBS report suggesting that Chinese domestic investors could allocate roughly $90B USD to equities as part of their excess savings. As YCC ends in Japan we expect a bear market in JGBs and a domestic reallocation back into equities.

We continue to favor credit vs Sov in FI and remain deeply UW the asset class while OWing Commodities across the complex as one would expect given our global macro view.

We expect the USD to resume its weakening path as the Fed ends its rate hikes and the ROW leads the way to economic recovery.

LETS GO DUKE!