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
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.
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.
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
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
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