America’s divergent path opens new global opportunities
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Investment management insights from a leading Canadian expert.

By Tyler Mordy  | Tuesday, August 08, 2017


One of Woody Allen’s most critically acclaimed films, Midnight in Paris, is a 2011 fantasy comedy that follows Gil Pender, a successful but creatively unfulfilled Hollywood screenwriter, who is pushed to confront the incompatibilities of his relationship with his materialistic fiancée, Inez. The mismatch is painfully obvious. Gil loves Paris in the rain, while Inez longs for a glamorous life in Malibu. An analogy can be made with today’s America, and its divergent path from the rest of the world.

In Woody Allen’s film, everything changes one night when Gil is time-transported back to the sizzling Paris of the 1920s. Besotted with the “moveable feast” days of Hemingway, Fitzgerald and other American expatriates, Gil shuttles back and forth each night – between nocturnal bliss and his sobering daylight reality. As he travels back in time every midnight, Inez and Gil’s divergent goals become increasingly evident.

A similar drama is unfolding in financial markets. With each passing week, it is apparent that America’s policy path is diverging from most of the world. Consider the latest example: America’s departure from the Paris climate change accord. Whether readers agree with the science or not, the U.S. exit further isolates its administration, leaving Trump alone with Bashar al-Assad of Syria and Daniel Ortega of Nicaragua as the world’s only non-participants. Oops?

Meanwhile, announcements overseas further highlight the differences. For example, under new policy plans in India, every car sold in the country from 2030 will be electric. In China, policymakers recently reaffirmed their commitment to produce as much clean electricity by 2030 as the U.S. does from all sources today. (Cracks within U.S. have even surfaced. News of the U.S. exit from the Paris accord prompted Elon Musk, arguably the world’s favourite face of climate change, to resign from Trump’s strategic and policy forum, tweeting: “Am departing presidential councils. Climate change is real. Leaving Paris is not good for America or the world.” )

Asia: America retreats, China fills vacuum

We return to a theme in this quarter’s report: America’s retreat from its global leadership position. Consider Obama’s “pivot to Asia,” with the Trans-Pacific Partnership being the centrepiece. It is now dead. That leaves Chinese President Xi Jinping’s “Belt-and- Road” strategy (his own version of “Make China Great Again”) as the uncontested blueprint for future economic integration in Asia.

China’s diplomacy now also offers a positive vision. In Davos this year, President Xi (a first-time visit for any Chinese President) defended globalization, positioned his country as a protector of free trade, and urged policymakers to “just say no” to protectionism. “Pursuing protectionism is just like locking one’s self in a dark room. Wind and rain may be kept outside, but so are light and air,” he said during his address. “No one will emerge as a winner in a trade war.” Trump was conspicuously absent from the gatherings.

European renewal

In Europe, Emmanuel Macron’s presidential victory in the French elections, with his La République en Marche party securing a record parliamentary majority, was won on a platform of pro-globalization, pro-free trade, and, importantly, potential federal solutions to the European Union’s (EU’s) structural problems (which could renew a cooperative Franco-German axis that drove the EU project since the early 1950s). That contrasts starkly with Trump’s “America first” agenda, whereby the U.S. effectively withdraws as global hegemon. Expect global leadership to continue to fill the vacuum left by U.S. nationalistic policies.

Investment implications

It has been a long – and many would say well-earned – period of outperformance for U.S. assets. Since 2009, America’s stocks and its currency have trounced their global counterparts. By early 2017, the U.S. dollar index had surged to a 14-year high as investors bet that Trump’s eye-watering fiscal expansion would prove a replay of early 1980s Reaganomics. Yet the big surprise of 2017 has been that the U.S. dollar has stopped rising. This is remarkable considering that the Fed is hiking rates and preparing to shrink its balance sheet.

What should investors make of this? There should be no doubt that America’s waning leadership plays a key role in the value of its currency. However, we have argued in our past few reports that U.S. equities are set to underperform. Why? Three key drivers of U.S. equity outperformance are going into reverse:

1. Fed tightening. In recent years, the Fed was the most aggressive liquidity provider in the world – this is no longer the case. The Fed is now tightening, while everyone else is on hold.

2. U.S. dollar overvaluation. In recent years, the U.S. benefitted from an extraordinarily competitive currency. This is no longer the case. In a very short period, the U.S. dollar has gone from being significantly undervalued against almost all currencies, to being fairly valued against most, to now being overvalued against the likes of the euro and the yen.

3. U.S. stocks lose lustre. In recent years, U.S. equities have been attractively priced. But this is no longer the case.

Indeed, American past performance is this year’s moveable feast. Where may the next phase of outperformance direct itself? Europe and Asia are the most likely candidates. Regions that have cheap currencies are showing signs of earnings and economic acceleration, and trade on much cheaper valuations.

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at . Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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