Unlock the Editor’s Digest totally free
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
The author is co-global head of funding technique for JPMorgan Non-public Financial institution
Market narratives have a tendency in direction of extremes. Is the US an unstoppable financial energy or a cautionary story of debt and dysfunction? The reality, as is so typically the case in investing, lies someplace in between.
Traders face appreciable coverage uncertainty from a brand new US administration. The general public debt and deficit have risen dramatically, and pending laws would seemingly exacerbate the pattern. Because the greenback has weakened and long-term bond yields have risen this 12 months, we’ve heard rising requires traders to slash their publicity to US belongings.
I might suggest a scalpel, not a hatchet. US exceptionalism, broadly outlined as US financial and market management, has not disappeared though it could be shifting in vital methods.
A key and under-appreciated factor of US exceptionalism is the financial system’s productiveness engine and that continues to be very a lot in pressure. By any measure, productiveness — primarily producing extra with much less — is a key determinant of long-term financial progress and company profitability. On this essential entrance, the US continues to guide and that may hold US equities a core holding in world portfolios for a few years to return.
Because the pandemic, US enterprise sector productiveness has grown at greater than 2 per cent per 12 months — a marked acceleration from the last decade earlier than — whereas the identical measure in Europe and Japan has barely been optimistic. Whereas US know-how grabs the headlines, productiveness good points are evident throughout skilled companies, logistics and even healthcare as companies embrace AI, automation, and digital infrastructure.
Increased productiveness has tangible implications for traders. It might improve company profitability, enhance total GDP progress and act as a deflationary pressure within the face of inflationary shocks. The Federal Reserve now estimates US long-run progress between 1.5 and a couple of.5 per cent — a significant step up. Europe and Japan, against this, stay hampered by weaker demographics and slower adoption of productivity-enhancing applied sciences. No shock, then, that US corporations proceed to generate stronger margins and extra dependable money flows compared with their developed market friends.
Nonetheless, two additional developments might problem the US productiveness edge and additional slim the hole between the US and different developed markets.
First, the US administration’s evolving tariff technique and levies have the potential to constrain progress and enhance inflation. Restrictive commerce measures might disrupt US provide chains and push up prices, undermining the productiveness good points companies have labored arduous to safe. Traditionally, US productiveness management has relied on open, aggressive markets.
Second, as Europe’s financial outlook brightens, its productiveness progress might enhance meaningfully. The report final 12 months by former Italian prime minister and European Central Financial institution president Mario Draghi laid out an formidable agenda for enhancing European competitiveness. Germany’s not too long ago introduced fiscal stimulus might probably improve annual Eurozone progress from a paltry 0.5 per cent tempo in 2025 to greater than 1 per cent in 2026.
Ought to each these traits materialise and/or speed up, it might weaken the case for a major obese to US equities
Nonetheless, if weak spot emerges in US belongings, it should present up extra within the dollar, not US shares. We see no significant menace to the greenback’s reserve foreign money standing. However the foreign money appears extra weak to shifting capital flows and softening fee differentials than a inventory market underpinned by structural productiveness good points.
Thus, even because the greenback seemingly weakens within the coming quarters, US equities can proceed to make new highs. This 12 months’s good points — with the S&P 500 now within the inexperienced year-to-date and up roughly 20 per cent from its April lows — inform us that fairness traders are pricing in a actuality many narrative-driven commentators are lacking.
Over the following 12 months we nonetheless anticipate a narrowing hole between the US and remainder of the world’s asset class efficiency — non-US equities look more and more compelling, notably for dollar-based traders. Total, I favour developed markets, particularly Europe and Japan, over rising markets. However whereas America’s financial management could also be more and more contested, its productiveness engine stays a robust pressure, holding US equities central to world portfolios. Traders would do properly to not overlook that.
