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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
The author is co-global head of funding technique for JPMorgan Non-public Financial institution
Market narratives have a tendency in the direction of extremes. Is the US an unstoppable financial energy or a cautionary story of debt and dysfunction? The reality, as is so usually 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 doubtless exacerbate the pattern. Because the greenback has weakened and long-term bond yields have risen this yr, we’ve heard rising requires traders to slash their publicity to US property.
I might advocate 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 economic system’s productiveness engine and that is still very a lot in power. By any measure, productiveness — primarily producing extra with much less — is a key determinant of long-term financial progress and company profitability. On this vital entrance, the US continues to guide and that may maintain US equities a core holding in world portfolios for a few years to come back.
For the reason that pandemic, US enterprise sector productiveness has grown at greater than 2 per cent per yr — a marked acceleration from the last decade earlier than — whereas the identical measure in Europe and Japan has barely been constructive. Whereas US expertise grabs the headlines, productiveness positive factors are evident throughout skilled providers, logistics and even healthcare as companies embrace AI, automation, and digital infrastructure.
Greater productiveness has tangible implications for traders. It could enhance company profitability, enhance total GDP progress and act as a deflationary power within the face of inflationary shocks. The Federal Reserve now estimates US long-run progress between 1.5 and a pair 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 when put next with their developed market friends.
Nevertheless, two additional developments may 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 may disrupt US provide chains and push up prices, undermining the productiveness positive factors 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 may enhance meaningfully. The report final yr by former Italian prime minister and European Central Financial institution president Mario Draghi laid out an bold agenda for enhancing European competitiveness. Germany’s not too long ago introduced fiscal stimulus may 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 tendencies materialise and/or speed up, it could weaken the case for a major chubby to US equities
Nevertheless, if weak point emerges in US property, it would present up extra within the dollar, not US shares. We see no significant menace to the greenback’s reserve forex standing. However the forex seems to be extra weak to shifting capital flows and softening fee differentials than a inventory market underpinned by structural productiveness positive factors.
Thus, even because the greenback doubtless weakens within the coming quarters, US equities can proceed to make new highs. This yr’s positive factors — 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 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, notably for dollar-based traders. General, 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 power, conserving US equities central to world portfolios. Traders would do nicely to not neglect that.
