For decades, US equities and bonds have been a foundational element of asset owner portfolios owing to the incredible growth and innovation the country has seen since the end of World War Two.
But David W. Rolley, portfolio manager and co-head of Loomis Sayles’ global fixed income team, says that “US exceptionalism may be over-owned” – even as the AI boom has investors dumping truckloads of cash into what have become the world’s biggest companies.
“There is some legitimacy to it in the AI space, but… it’s not clear how AI’s benefits are going to be monetised,” Rolley told the Investment Magazine Fiduciary Investors Symposium in the Blue Mountains on Tuesday.
“The big guys who are spending the money, and they’re spending big money on hyperscale server farms and things like that, think that it will be like other platform network effect on stuff they’re familiar with and whoever gets there first wins and gets it all.
“But there’s another model and that other model would be the PC model of the 1990s where you didn’t really want to be a massive shareholder of say, Gateway or Compact or HP. That did not work out well; the benefits were to the users. The productivity was there but there was no moat around the technology that kept it all for the PC producers.”
And the growth exceptionalism story has a lot of challenges, given there will likely be lower migration to the United States – something Rolley called an “own goal”, along with the defunding of fundamental research in healthcare and biology. Biotech companies and big pharma don’t spend their R&D budgets on fundamental research because it’s too uncertain. Instead, they wait for a breakthrough.
“If you cut the pipeline of fundamental discoveries to these guys, don’t expect to see the same kind of success that you would otherwise,” he said.
Another problem is that the US is now restrained from launching any significant fiscal stimulus; the bond vigilantes “are not going to permit that” owing to the debt to GDP ratio.
All of that leaves investors that have bought the US exceptionalism story for decades with a big problem: what to buy now. And the solution isn’t simple.
“It’s a mistake to look for a safe asset, whether you’re talking about gold or yen or Switzerland. I don’t think there is such a thing as a safe asset,” Rolley said.
But there is a safer asset allocation structure. If asset owners feel that parts of their portfolios are over-exposed to North America, it’s a big world; they can rebalance. Though its rival, China, doesn’t necessarily represent a better investment.
“In Thucydides Trap stories, where you have two rival powers that kind of run into each other and do a lot of damage, they both lose,” Rolley said.
“Athens and Sparta both lost; the big winner was Thebes and then Macedonia. When Germany ran into the United Kingdom in the early 1900s, they both lost; the big winner was the Americans, even though they didn’t know it at the time.”
So third countries can benefit enormously, Rolley said. And a small amount of money coming out of a big market like America can be a lot of money to a small market.
“Money will move markets, and it will move multiples,” he said.
“I don’t think it’s a coincidence that Sweden massively outperformed the US dollar this year after doing nothing for 10 years. It was a total value trap; then: boom – best performing G10 currency…. Malaysia and New Zealand are small. So don’t be surprised if all of these markets surprisingly outperform.”
But Rolley has another “high concept” idea for the post-Trump world: investors should be keeping an eye on the oceans. The 50s and 60s were a period of “extraordinary” trans-Atlantic development that resulted in significant growth in Europe and the US. Now another part of the world is on the same trajectory.
“You want to look at the Indian Ocean and the greater Indian Ocean economy as that emerges over time,” Rolley said.
“You want to look at the acceleration in cross-country trade that does not involve the United States of America or the People’s Republic. You want to look at sub-Saharan Africa. You want to look at the Mid-East, and you want to look at South-East Asia. That is, I think, where a lot of the energy is going to be over the next 20 years, and that’s an interesting space for both equity and credit.”
