As The Tri Polar World Turns: Will Policy Continuity Trump Political Discontinuity?

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EXEC SUMMARY

Our title lays out the key post-election question for investors. A narrow Republican sweep sets the stage for political discontinuity – will policy follow suit? We don’t think so and expect Trump to follow in the pro-growth footsteps of his predecessor.

We were wrong about the election as low information, low propensity voters came out to express their displeasure about inflation and immigration. Trump widened his appeal across multiple segments of the electorate as the right wing media ecosystem overcame the traditional cash and ground game advantages held by the Harris campaign.

American exceptionalism (shining City on a hill etc.) now called into question as the slow turn to oligarchy picks up pace. Unqualified nominees to key levers of Govt (Defense, Intelligence, Law and Health) send a worrisome signal as does the plan to appoint them rather than seek traditional Senate advice & consent.

As investors we need to live in reality. Which Trump will we get is a major question. Will it be full bore Trump – he is of the 60% tariffs, mass deportations and large tax cuts? Will it be golfer Trump – more focused on his short game than policy making? Might it be Low T Trump, content to simply rename the Biden economy as his own and carry on?

We will find out in the months ahead. A narrow House majority, inflation worries and the desire to keep the growing Latino vote share on side suggest some dialing down of campaign promises - a time-honored political process.

We expect Trump 2.0 to accelerate our Tri Polar World (TPW) thesis of regional integration in Asia as China seeks to deepen trade ties with SE Asia – the world’s growth hot spot while Europe recognizes the need to perhaps fight on alone. Trump will cement China’s dominance of the clean energy space given his view of it all being a “hoax” while bolstering the forces of AI and Crypto.

Investment wise we stay full invested and expect further global equity upside on both a tactical and strategic basis. ST, seasonality is supportive through the Inauguration while a performance chase into YE by underperforming active managers suggest any pullbacks are likely to be shallow and should be bought.

Strategically, we remain with our global bull market view supported by a global economic long cycle as we described in our 2015 Outlook. Policy continuity, especially in the new industrial policy space to compete in AI, Climate and Defense is critical to that outlook, fusing as it does fiscal and monetary support across both the public and private spheres on a TPW basis.

We stay OW global equities, deeply UW Fixed Income and OW Commodities in our Global Multi Asset (GMA) model portfolio. We look to Cyclicals as global growth picks up, SCs as a tariff hedge, thematics as laggards catch up and non US equity including EM that have been left behind in the rush to gain US exposure. ( See Chart 28)

We continue to watch the USD for signs of weakness as we see it as a key potential catalyst for a shift to non US assets. US equities are priced for perfection, the rest of the world is not - could that be the opportunity set? 

CLIMATE

US cements China dominance in clean energy as Trump reinforces his “hoax” point of view.

Biden announces a major US expansion of nuclear power to maintain AI leadership – we expect Trump to sustain this approach.

COP29 is likely to be limited in its impact as the TPW focuses internally.

ECONOMICS

The global economy is in solid shape with inflation under control and both fiscal and monetary policy employed by the US and China to sustain their growth profiles.

Europe is under pressure from all sides to act; we watch Germany and its upcoming elections early next year as a possible catalyst to jump start its own economy and the broader European project.

We note BofA’s 2025 forecast for a pick-up in non US GDP growth from 3.2% this year to 3.5% while the US is forecast to slow from 2.7% to 1.9%. This could support a reallocation away from the US.

POLITICS

We expect limited room to maneuver in the House and a desire to maintain the winning coalition will curb the most aggressive Trump campaign promises though we admit to worries we might be too sanguine given the signal sent by his Cabinet nominees.

We do expect Trump’s victory and return to the White House to accelerate efforts in both Asia and Europe to deepen regional integration, protect themselves from Trump’s worst excesses and size up to confront the US as bully.

POLICY

We expect continued global fiscal and monetary support in 2025 as we enter the middle years of our 2023-2027 Long Cycle thesis.

A slow US rate cutting cycle is healthy; an overheating US economy (the hothouse effect) is a risk as it could lead to rate spikes that slow the economy while tying the Fed’s hands.

We look to faster action in Europe and Asia with China focused on boosting domestic demand while Europe seeks to deepen investment and improve its competitive position across Climate, AI and Defense.

Those regions able to best harness the new industrial policy mix will be the Long Cycle winners.

MARKETS

Markets hate uncertainty and Trump is nothing if not a chaos agent. Yet solid global growth, a synchronized easing cycle & policy continuity leading to double digit EPS growth in the US and Asia should support a continuation of the global equity bull market.

A US equity performance chase is feasible into YE given active manager underperformance and a short time window. Seasonality and buybacks help underpin equities and reduce the likelihood of pullbacks being anything but healthy.

Such pullbacks are likely given overheated sentiment and overbought conditions though the past few days has helped reduce these conditions. Use pullbacks to build positions in laggards as the Long Cycle provides time for them to work.

We include thematics such as Fintech, Cyber and Robotics in that laggard category as well as clean energy which may be finding a bottom amidst the Trump distaste. 

Should Trump upend policy continuity as he has done to political continuity it could spark a reallocation into non US equity including Europe and EM both of which sit at multi year lows vs US equity.

A big question is whether US risk asset exceptionalism represented by premium valuation & all time high global index weightings can be sustained while political, social and legal exceptionalism fall by the wayside. Sure, it depends on earnings and margins which might be bolstered by deregulation and further tax cuts but much is in the price & further multiple expansion seems unlikely.

Year 3 of SPY bull markets tends to be a rest year; if ROW growth picks up and US equity returns slumber the sting in the bull market tail could be ROW outperformance just as all pile into the US. 

We watch the USD for signals to that effect – clearly none are being sent in the post-election period as USD strength continues unabated.

We remain UW Fixed Income and out of UST. We note that China just issued USD bonds at rates comparable to UST while China equity sits at record low relative valuations to US equity. We prefer credit exposure in both US bank loans and EM HY and Govt debt.

Commodities remain as an overweight position in our GMA model. With both the US and China goosing their economies we struggle to see how this is not a bullish set up for the Commodity sector across precious and industrial metals as well as the energy complex. 

We continue to think that the last thing one wants to do in a long cycle bull market is to leave too early. Stay the course with an eye on Trump and the USD.