"THE DIFFICULTY LIES NOT SO MUCH IN DEVELOPING NEW IDEAS AS IN ESCAPING FROM OLD ONES." ~ John Maynard Keynes

"THE TRUE SIGN OF INTELLIGENCE IS NOT KNOWLEDGE BUT IMAGINATION." ~ Albert Einstein

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‍The Big Picture

There are two major secular trends which will impact our socioeconomic experience over the coming decade and beyond.

·      The Fiscal age, and

·       The AI Revolution.

These two major trends will have the opposite effect on output and economic growth. However, we believe they are also misunderstood and the results underestimated.

The technologists are winning, they are taking over the White House, are eating corporate profits, and they will exacerbate inequality.

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Politics & Policy:

We believe Scott Bessent appointment is very significant and perhaps ranks him as one of the most important individuals of 2025. As it stands, he has three primary objectives:

1. Lowering energy costs,

2. Increasing U.S. real trend growth, and

3. Cutting deficits.

Whilst he has his work cut out, we believe these are achievable should he remain in place for the full 4-year term and the U.S. avoids a downturn during this period.

However, cutting deficits in the short-term would require austerity – which we believe is highly unlikely. The French has proven so much and MAGA is anything but austerity.

The relationship between tariffs and inflation is not straightforward so the new inflation narrative surrounding tariffs is perhaps misguided. Tariffs can be inflationary but only if demand can grow alongside it.

Immigration has been a key driver behind the robust U.S. economy, changing the direction of immigration policy will likely put a strain on economic output.

The transfer mechanism of monetary policy has been ineffective in a post-GFC world, whilst fiscal policy (and a strong U.S. Dollar) is the reason for the rise of ‘U.S. exceptionalism’.  

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Inflation

The near-term deficits in the U.S. are likely to continue to grow, meaning inflation is likely to remain sticker than expected, and so will interest rates. However, we believe the risks are materially to the downside.

Inflation in Europe and U.K. will continue to trend downwards whilst China will continue to struggle with deflation as they tackle depression-like characteristics in 2025.

Japanese inflation is currency dependant, and one key reason for higher inflation in Japan has been the weak Yen. We believe the Yen is extremely undervalued, meaning Japanese inflation scenarios are skewed to the downside.

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Economic Growth

Global growth is on a knife’s edge, with the U.S. consumer really the only reason why we’ve not seen a global recession. Whilst all indicators suggest U.S. consumption remains robust, we believe the downside risks are underestimated.

President Trump’s proposed tariff and deportation policies will likely put significant strain on the U.S. economy.

U.S. Corporate investment and R&D is seeing a resurgence on the back of the AI revolution. No other economy is seeing similar dynamics, in part due to their lack of large technology sector.

Whilst U.S. economic and corporate profit growth will most likely continue to diverge from the rest of the world, investors need to remain nimble and quick to adapt given the significant downside risks posed by valuations.

We believe Japan stands out as an economy where output and growth potential to surprise are skewed to the upside.

Ultimately, global economic weakness will result in rate cuts well ahead of expectations, fiscal support despite already large deficits globally, and the MMT-playbook will resurface. Investors should be ready to embrace opportunities if we see economic weakness and material drawdowns.

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Valuations & Asset Allocation

IG credit will see a significant refinancing cliff in 2025 – a material risk to an asset class where spreads are trading at historic lows.

U.S. large cap tech behemoths are trading well above historic averages – and close to all-time highs. This is reflected in valuations of market cap weighted indices like the S&P 500 and MSCI World, meaning downside risks from multiple contraction is very significant.

We remain overweight equities in the U.K., Japan and China, which stands out as materially undervalued, with negative sentiment and fundamentals reflected in valuations and risks skewed to the upside.

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