Winner take all: the year of the unipolar market

As 2024 draws to a close, it’s time to reflect on the year nearly behind us and the one that lies ahead. I won’t be sending the next edition of this newsletter until after the new year. I’ve published 45 of these in 24 and am grateful to all my readers. Expect some changes here in 2025 as I continue to improve this product. In the meantime, Happy Holidays, Merry Christmas, and all my best wishes to you and yours for the new year!

A “sovereign vibe”

This year has clearly seen the prevailing winds of global economic fragmentation strengthen.

Yes, Trump’s victory in November’s U.S. presidential election is a big part of the story.

But the orange man’s return to the White House is also just one of many symptoms - albeit the most visible one - of myriad undercurrents that are reshaping the global economic order.

Though we shouldn’t push the narrative too far, either: the world isn’t really deglobalizing.

I see it instead as a reassertion of nation-state primacy over multinational corporations. In other words, a sovereign vibe.

America’s most powerful CEOs have been quick to kiss the ring, as they seek to curry favor with the incoming president.

And also as many of them continue to hope to benefit from offshoring profits via transfer pricing, which strongly reduces the taxes they pay in the U.S. or other jurisdictions.

Indeed, Ireland’s tax receipts from U.S. pharmaceutical and tech multinationals could be at risk from the new U.S. administration’s policies as early as next year.

Multipolar geopolitics, unipolar markets

Once again, U.S. equities have outperformed the rest of the world’s stock markets.

One comment I read this week - and since lost to the sands of time - from an asset manager even went so far as to say that it was essentially the only stock market in the world anymore.

I wish I could source the quote, but the point is that “as America sucks growth away from the rest of the world with trade tariffs, the case for US stocks over Europe or Asia is just overwhelming.”

Earlier this autumn, Ruchir Sharma wrote that:

• “It’s as if America is the only nation worth investing in.”

• “America’s share of global stock markets is far greater than its 27 per cent share of the global economy.”

• “Though most observers think the world is increasingly multipolar, investors believe it is increasingly unipolar.”

Though it should be noted that Sharma believes U.S. overvaluation and overinvestment from abroad is the “mother of all bubbles.”

American exceptionalism

Nevertheless, there seem to be good reasons for which investors are overweight in U.S. markets.

The American economic machine is working in a way that the European Union’s just isn’t.

EU public company creation at large valuations in the past 50 years is a rounding error compared to the market capitalization that U.S. firms have created.

I could bombard you with charts about how the U.S. is outpacing other economies on GDP per capita, business investment, or R&D spending, but they essentially look something like the productivity chart below.

The other G7 economies haven’t been able to match that American mojo over the past few decades.

So the unipolar investment pivot towards the U.S. seems to be grounded in economic reality.

Is globalization really dead?

Some argue otherwise.

An excellent IMF paper by Serhan Cevik released in 2023 found that the “widely-used indicators of globalization, such as international trade and capital flows, have rebounded strongly, despite the fears of discriminatory fragmentation and protectionism.”

Moreover, “the much-discussed geopolitical alignment between countries, as measured by the similarity of voting behavior at the UN, has contradictory and statistically insignificant effects on trade.”

Income and distance appear to be much stronger and more reliable predictors of trade between countries.

The author goes on to say that “international trade relationships have proven to be, by and large, resilient to changes in the geopolitical landscape over a long period from 1948 to 2021 with several intervals of heightened geopolitical tensions.”

So it’s not so much that the world is totally deglobalizing.

Rather, global economic integration is merely slowing down at this point in its decades-long cyclical periods of ebb and flow.

What about emerging markets?

This is tough. This week alone the Brazilian real has been cratering and the dollar has strengthened further against all comers.

Indeed, Trump’s fiscal and trade policies both point to a stronger greenback.

So do ongoing U.S. growth outperformance and a Fed that needs to slow the pace of rate cuts.

Many currency valuation models are built on the idea of mean reversion, but we may be headed to a new normal where few if any currencies will bounce back against mighty dollar.

Local currency debt offers some degree of hope across the EM complex, as these markets have expanded significantly.

Yet even here we see that the investor base is increasingly local, while foreign investors have reshored their investments.

A strong local investor base provides stability, but international portfolio investors could do a lot to deepen these liquidity pools.

So, here again, we see a turn inward and/or toward the U.S. by advanced economy investors, which suggests that going forward idiosyncratic investment themes will be more important than previously to attracting much-needed foreign capital.