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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 Personal 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.
Buyers face appreciable coverage uncertainty from a brand new US administration. The general public debt and deficit have risen dramatically, and pending laws would possible exacerbate the development. Because the greenback has weakened and long-term bond yields have risen this 12 months, we’ve heard rising requires buyers to slash their publicity to US belongings.
I might advocate a scalpel, not a hatchet. US exceptionalism, broadly outlined as US financial and market management, has not disappeared though it might be shifting in vital methods.
A key and under-appreciated factor of US exceptionalism is the economic system’s productiveness engine and that is still very a lot in pressure. By any measure, productiveness — basically 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 steer and that may preserve US equities a core holding in international portfolios for a few years to come back.
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 constructive. Whereas US know-how grabs the headlines, productiveness beneficial properties are evident throughout skilled providers, logistics and even healthcare as corporations embrace AI, automation, and digital infrastructure.
Increased productiveness has tangible implications for buyers. It could actually enhance company profitability, increase general 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 firms proceed to generate stronger margins and extra dependable money flows when put next 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 increase inflation. Restrictive commerce measures might disrupt US provide chains and push up prices, undermining the productiveness beneficial properties 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 lately introduced fiscal stimulus might doubtlessly enhance 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 developments materialise and/or speed up, it might weaken the case for a big chubby to US equities
Nonetheless, if weak point emerges in US belongings, it would present up extra within the greenback, not US shares. We see no significant risk to the greenback’s reserve foreign money standing. However the foreign money appears extra weak to shifting capital flows and softening price differentials than a inventory market underpinned by structural productiveness beneficial properties.
Thus, even because the greenback possible weakens within the coming quarters, US equities can proceed to make new highs. This 12 months’s beneficial properties — 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 buyers are pricing in a actuality many narrative-driven commentators are lacking.
Over the subsequent 12 months we nonetheless count on a narrowing hole between the US and remainder of the world’s asset class efficiency — non-US equities look more and more compelling, significantly for dollar-based buyers. 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 international portfolios. Buyers would do properly to not neglect that.
