As The Tri Polar World Turns: Transition Time

Executive Summary – 450 words, 1.5 minute read

Unsettled markets provide opportunity to establish positions. Focus on the direction of travel, not the periodic “pothole”.

From a tactical POV, cascading fears have given investors multiple opportunities to sell and they have, in some cases at a historic pace, leaving the S&P in its 1st oversold condition in more than a year. Positive offsets include: seasonality trending favorable, Delta fading, US growth lull over and Asia reopening.

Strategically, the Delta delayed, synchronized global expansion is now back on track. 2022 GDP growth in both nominal and real terms should be more than 2x the historical average, supported by inventory restocking, strong consumer demand & a cap ex boom.

Amidst the seasonal transition from Summer to Fall, three major market transitions lie ahead: from liquidity driven to earnings driven equity markets; from Growth driven to Cyclical/Value driven equity leadership and in Fixed Income land from a 40 year bull market in US Govt debt to a bear market. The climate transition to a low carbon future overshadows all.

We remain constructive and OW Equity and Commodities while remaining deeply UW Fixed Income.  Favorites include: Cyclicals, Value and Small Caps in the US, Europe and Japan among non US DM and EM exposure across the Tri Polar World’s 3 main regions coupled with energy and metals.

CLIMATE

Energy supply disruptions reinforce the need to move to a low carbon future and to do so in a planned and thought out manner. Biden infrastructure plan is critical for the US, the easing of Maastricht debt rules the same for Europe and Asia’s coal reliance needs to end. Energy supply shortfalls likely to prove temporary, price rises likely to be more sustainable.

ECONOMICS

Slow growth headlines = yesterday’s news with global airline departures at pandemic highs & Citi US ESI well off its bottom. Q3 lull turning into synchronized global expansion. Expect continued high nominal GDP growth across the Tri Polar World.

POLITICS

Covid, Climate and now energy shortages lead to bigger Govt role. Multiple decision points ahead on the US political scene; new leadership in Germany and Japan face challenges to move their countries and regions forward.

POLICY

Global tightening cycle starting to unfold while fiscal policy enters pullback mode as countries transition away from emergency programs. Climate and corporate policy come into focus as cap ex boom & productivity surge start to play out.

MARKETS

Market chop frustrating and slightly unnerving. Technical levels remain important. Main underpinnings of bullish equity and commodity positioning remain intact. Recent USD strength unlikely to be sustained as synchronized global expansion unfolds. Earnings focus ahead and should be supportive.

TGIF!