The past 20 years have seen large pools of capital become larger, more global and more diversified across asset classes. The Fiduciary Investors Symposium has heard how Bridgewater Associates is allocating capital and resources to meet this shifting paradigm and why investors can’t try to bet on certain geographic regions overperforming.
The past 20 years have seen large pools of capital become even larger, more global and more diversified across asset classes.
But at the same time, the world has become multipolar and liquidity cycles have become desynchronized.
Facing these challenges, the Fiduciary Investors Symposium in Oxford has heard how Bridgewater Associates is allocating capital and resources around the world.
The firm’s senior portfolio strategist, Atul Lele, told the symposium that these challenges have been presented by their long-term strategic partners to solve.
To achieve this, Bridgewater uses three questions to assess global asset allocation: how attractive the country’s assets are, which assets to buy and what currencies to hold and invest with.
“If you look at the secular growth outlook for any economy, it’s driven by two things, productivity and indebtedness,” Lele said.
“On a market cap weighted basis, the secular growth outlook has slowed quite materially when you think about where the US or Europe are.”
Lele said the past two decades have seen the global economy shift eastwards with a greater share of global output now coming from Asia.
“The share of global output that is driven out of Asia is roughly double what you see out of the US and Europe. The contribution to global growth is around six times,” Lele said.
“The Asian economic bloc is now highly interconnected through trade and capital flows. Asia’s largest trading partner is Asia.
“Even if you remove China, Asia ex China’s largest trading partner is Asia ex China. We now have a deeply interconnected trade and capital bloc. This speaks to the idea of having a very multipolar world relative to even 20 years ago.”
Hedging your bets
If investors are asking themselves whether being in every geography is worthwhile – and whether it was instead better to take bets on certain regions – Lele said the former is more important.
“If we look at most institutional portfolios they’re essentially betting on a continuation of US and to some degree European outperformance,” he said.
“They’re US and European-centric portfolios and we do think that geographic diversification is important in this multi-polar world.”
Lele noted this doesn’t mean there needs to be a rush for diversification for the sake of it, but portfolio managers need to be mindful of missing out on broader diversification.
“Where we are right now, it [the level of diversification] is low, as in investor allocations towards the US and Europe are so high and making this bet that you’re going to continue to see a unipolar world, when it’s very apparent you’re in this multipolar world,” Lele said.
With US President-elect Donald Trump winning a second term, investors are expected to face similar uncertainty as with his previous term. Lele said by taking Trump’s policies at their intent, it’s likely to be an inflationary environment rather than deflationary.
Trump had campaigned on placing tariffs on Chinese imports, potentially as high as 60 per cent, while he also promised to clamp down on undocumented immigrants.
“If we start to move up to the inflation limit which these tariff policies, these immigration policies will do then it starts to make it a less favourable environment for liquidity and therefore into assets,” Lele said.
“An environment which is likely going to accelerate a lot of the multipolar aspects that we see about the world.
“What the practically means is we’re in a trade war that’s expanded to a capital war and a tech war. We all hope it doesn’t escalate beyond that and hopefully it de-escalates into strategic competition as we saw between the US and Japan in the 1980s.
“But not only are we seeing the world that President Trump is articulating as being inflationary from purely a US perspective, but if you talk about the of reshoring it’s all very cap-ex intensive and that’s inflationary as well.”
Maintaining exceptionalism
As the largest global economy, Lele noted the US is currently 70 per cent of the global market cap for investors.
“That means to even maintain where it is, every marginal dollar that everyone in this room invests 70 cents of it needs to keep going into the US market and there’s going to be limits on flows and limits on discounting,” Lele said.
“If you look at what’s priced in for the S&P 500, it’s pricing in another decade of exceptional growth. It could happen but we’re going to be hitting some of the limits on the pro corporate side and on the flow side as well.”
Global markets have been dominated by US exceptionalism, but Lele said the big question is whether they will continue to maintain this status longer term.
“We’re asking ourselves what the limits are on it is because over the last 15 years you’ve seen the US outperform and if we look at the underlying performing it isn’t because it’s just a tech story,” Lele said.
“One third of it has actually been driven by the US tech and the sector composition of the US market but two thirds of it has actually been driven, within sectors, just US companies operating at a much better way than what you see around the world.”
Lele said the limits of US exceptionalism come down to how much further it can make gains in a pro-corporate environment.
“The last 40 years you’ve seen a pro-growth, pro-liquidity, disinflationary environment,” Lele said.
“Deregulation has been on a one-way street, de-unionisation has been on a one-way street, corporate taxes on a one-way street, interest rates being eased on a one-way street. There are limits to which those pro-corporate policies can continue. There are limits to how big the US can become as a share of market cap.”
