We remain constructive on global equities on both an ST tactical basis as well as on a longer time frame, writes Jay Pelosky, founder and principal at TPW Advisory.
Our Long Cycle thesis is intact & features a young global equity bull market underpinned by solid EPS growth generated by a robust global economy underpinned by sustained fiscal & monetary easing. This fiscal & monetary support is best encapsulated in the new industrial policy model that has burst onto the global scene with its modern brand of public & private support to conquer the commanding heights of Climate, AI, and Defense. It has led to the upending and recasting of policy models across the Tri-Polar World’s (TPW) three main regions: Asia, Europe & the Americas. It is time to shift gears, in Germany, in China, in the US.
In Asia, China’s export/infrastructure-led model has resulted in overcapacity & deflation at home and rising barriers to entry abroad, not to mention unacceptable exposure to the Trump tariff threat. In Europe, Germany’s export model, dependent on cheap Russian energy, a cheap euro, and surging Chinese demand has imploded resulting in a stagnant economy and collapsing auto industry.
In the Americas, the US model of massive peacetime fiscal deficits is unsustainable & threatens domestic social-political stability while its financial assets are priced for perfection. Something has to give. We see Trump 2.0 as a positive catalyst for change abroad more than at home where the impact is much more uncertain. Positive change abroad is not in the price of those assets nor is any faltering of US exceptionalism priced into US assets.
Thus, we see better risk-reward abroad. We expect the global equity bull market to broaden out geographically as boring year three US equity returns encourage investors to look abroad to cheap, under-owned assets where positive change has yet to be priced in. A decline in the record-expensive USD could be the tell; dollar weakness would support European & Asian consumption & provide a tailwind to non-US asset appreciation.
CLIMATE
The race to dominate the renewable, EV and battery space is over & China has won going away. The fight now shifts to AI & Splinternet. From the Northvolt battery bankruptcy and Volkswagen’s 1st ever German layoffs to the US where clean energy projects are on hold due to Trump Admin policy uncertainty China is the winner. Nuclear power remains the single area where US & European companies retain an edge.
ECONOMICS
The global growth & inflation picture remain supportive. The world’s two leading economies, the US & China, are both stimulating while Europe looks to catch up via a combo of ECB easing and German fiscal expansion. BofA notes an OECD average fiscal deficit of 5% of GDP and expects a further 124 rate cuts in the coming year. Fiscal is more important than monetary policy but having both on the side is good for growth.
We note that both Germany and China, the two economies most in need of boosting domestic demand, have significant room for fiscal expansion. A model shift away from ever larger trade surpluses in these two countries could presage a global FX realignment.
POLITICS
A record 6th US change election in a row suggests an electorate unsure of what it wants. The Trump campaign promised rapid and significant change; its small victory margin and equally small House majority coupled with likely infighting among a mediocre Cabinet implies more bluster than bite.
We expect new German leadership to ease up on its debt break and take advantage of its expansive fiscal room. Over the last month, likely next Chancellor Merz, the head of the Bundesbank, and former Chancellor Merkel have all come out in support of such a policy shift.
POLICY
Internal disagreements on growth vs spending cuts, tariffs vs nontariffs, strong $ vs weak, China hawk vs dove all imply limited policy traction in Trump 2.0.
Trump 2.0 is likely to resemble Trump 1.0. He is an old dog and old dogs rarely learn new tricks. The Bessent three-arrow approach to the economy seems inconsistent and unlikely to be achieved.
The recent Trump tariff tweetstorm reminds investors that we’ve seen the playbook before as have other countries, many of whom are primed to respond in kind. Most importantly much seems to already be priced in. We expect more policy action outside the US as noted above. Part of it is to hedge against Trump's risk but the drivers are internal. We expect Germany to invest heavily in its future while China acts to boost its domestic demand, none of which is priced into its assets.
A key policy risk is US overheating driven by Trumpian overreach and an already hot economy. Rising inflation would bring out the bond vigilantes and perhaps force the Fed to shift back to rate hikes which would likely call the EPS trajectory into question and could negatively affect stocks.
MARKETS
US exceptionalism is well entrenched and fully priced in. We know trends don’t change overnight and that catalysts are hard to identify in advance. We expect a boring Year 3 for US equity returns coupled with positive policy shifts in Europe & Asia to stimulate earnings growth, drive investor interest, and boost stock prices, none of which is priced in. We look for mid-single-digit type US equity returns next year overshadowed by mid-double-digit non-US equity returns led by EM/China as the global bull market broadens out geographically.
The USD could be key; record expensive in real terms, rejected at a key technical level, now managed by a Trump Admin that can’t decide whether it wants a strong $ for bragging rights or a weak dollar to boost domestic production. Watch the Yen & Yuan as rising JGB yields support the Yen while a rising Yuan would boost domestic demand in China.
Within our Global Multi Asset (GMA) model we remain OW global equities (and OW EM), deeply UW fixed Income (with the US & China stimulating why own duration). Watch the long end of the Chinese government bond market for signs that growth measures are starting to bite. We prefer credit in both the US and EM. We remain OW Commodities and note the commodity–bond relationship is at a critical juncture. We prefer the miners in gold, copper, and uranium. Within our TPW 20 thematic model, we note improving technicals in many areas including fintech, cyber, robotics, and biotech. We see Crypto as a big winner from the Trump deregulation push and remain long Bitcoin.
