As The Tri Polar World Turns: Springing Forward
SUMMARY:
Spring weather brings a sense of excitement to the air. Cross Asset markets have been busy pricking bubbles but bubble talk and zombie company fears remain (overstated). Regime changes are unfolding across the political and policy spaces. The full global reopening is just ahead.
My advice remains: ignore the inflation debate a while longer, don’t worry about the Fed, keep calm and carry on. Remain overweight Equity, especially non us DM equity, underweight Bonds, especially Sovereign & Overweight Commodities. Look to re-opening laggards to participate in the upcoming 2nd leg of the Rotation. Sell in May is tempting but too early – testing times will arrive in late Summer.
HEALTH
Follow the leader remains the mantra & the UK and US lead. Europe’s vaccination process is finally accelerating and the summer should be saved. Japan and EM have been subpar as reflected in their YTD equity performance.
I may retire the Health component of the Global Risk Nexus (GRN) process as Covid ceases to drive everything. This is true even with the recognition that “herd immunity” and going back to pre-Covid days is less likely given the varying vaccination rates in and between countries. It will be a game of variant whack a mole – expect science to continue winning.
ECONOMICS
The global BOOM I wrote about almost six months ago is now common wisdom with global growth forecasts of over 6% this year and 4%+ next vs the 20 yr. average of 3.5%. The crazy numbers we see day by day are transitory and should be treated as such. The question is whether inflation will also prove transitory.
We will find out more in the summer as the mechanical inflation pick up rolls off, the Fed updates its forecasts and we get more clarity around supply shortages, demand surges and importantly the velocity of money which remains stuck in the mud. I struggle to see inflation surging when the “digitalization of everything” is the rally cry.
POLITICS
The Biden Admin’s Go Big, Go Fast approach suggests a transformational Presidency. Polling supports the plans more than the man who is betting that solving Covid and jumpstarting the economy will be winning political formulas in 2022 and 2024.
One of the questions I am pondering is whether an improving US political brand value will be offset by a decline in the relative valuation of US financial assets? As US exceptionalism fades and the twin deficits soar what happens to the USD, to rates and thus Big Tech?
From a Tri Polar World POV, its great to finally see the US moving ahead on Hemispheric issues – a cross border railroad M&A battle, shots to Mexico and Canada, a Marshall Plan proposal for Central America – all good stuff.
Keep an eye on European politics as well – from Germany’s upcoming election which could herald a breath of fresh (Green) air to Mario Draghi’s efforts to remake Italy – North and South could both be moving in the right direction in the years ahead.
POLICY
The Biden onslaught has clearly set the global policy pace and it has the potential to reshape American economy & life for years and decades to come. Corporate tax hikes to pay for the Jobs Plan and taxes on the wealthy to pay for the Family Plan are both politically astute and a recognition that the trickle down economic theory may finally be put to rest.
Climate policy & the US led commitment to further accelerate emission reductions reinforces the Covid speed paradigm shift I have been discussing and deepens the potential for thematic investment to generate alpha.
Europe’s vaccination and growth policy mix has had a bad run but both are improving – the divergences between it and the US on these fronts are likely at their wides. The Joint Recovery Fund (JRF) should be approved by all in coming weeks and monies should start to be disbursed shortly – the silver lining might be that Europe’s 2022 growth turns out better than the US.
MARKETS
Beyond the issues of faster discounting and the dichotomy between rising US political values and falling (relative) asset values there are a few other issues to consider. One is the potential for the global reopening trade to push rates higher across the DM markets and provide a 2nd leg for the Rotation. How this might impact the thematic sleeve of the model portfolio is a big question.
The other is the testing time for risk assets later on in the summer as investors get to analyze whether inflation is more sticky than transitory. Poor seasonality, thin trading could set the stage for the pullback so many are waiting for.
Today’s opportunity might lie in the re-opening laggards, especially in Japan and parts of EM – mainly the old style EM in Latin America. JPM notes for example that Japan and Brazil are among the cheapest markets in the world; activist investors are circling Japan while Brazil’s currency is rallying vs the USD.