The post-financial crisis era of US ‘exceptionalism’ could be about to fade and force investors to reposition their portfolios to regions with greater growth prospects, according to multi-asset strategists at JP Morgan Asset Management.
The structure of the market and its under-investment in more long-term themes means that the US could take a backseat to other regions in the years ahead, the asset management house noted in its Long-Term Capital Market Assumptions.
“We’ve put a question mark on this because it’s yet to be fully tested, but across three axes we are seeing a reduction in US exceptionalism,” said Thushka Maharaj, global multi-asset strategist.
“The first [axis] is in terms of pro-cyclical fiscal stimulus. We had a long period of time over the last three-to-five years where we saw strong fiscal spending in the US, but not necessarily in other developed markets.
“We now think that the euro area is providing a strong counterpart so that exceptionalism in pro-cyclical fiscal stimulus is reduced for the US.”
Maharaj said the second axis is monetary policy. "The Fed was the only developed market central bank hiking rates in the last cycle," she noted. "That rate support was a strong area of exceptionalism for the dollar and now we see that fading.”
As the below chart shows, the majority of the International Monetary Fund’s other reserve currencies have made gains increased in value against the US dollar, year-to-date.
Performance of IMF reserve currencies in US dollar YTD
Source: FE Analytics
The third axis is foreign relations and trade policy, as the team is expecting a return to more traditional politics under the new US administration.
“So, economic exceptionalism is starting to fade and we expect that to translate into a secular downtrend for the US dollar,” Maharaj said.
While the US economy and market is not becoming weaker, said global market strategist Vincent Juvyns, it is likely to be challenged by other markets for leadership.
Juvyns said the US market was perhaps entering a secular downtren on many levelsd, which means that sterling-based investors may get less from their US dollar-denominated assets.
The strategist said equity returns in 2021 will likely be lower across the board given valuations currently and the sharp recovery of markets following one of the worst-ever sell-offs in March.
However, Juvyns said for the US there were also some structural reasons that returns would not be as high next year.
“Obviously, US exceptionalism over the last couple of years has been driven by the tech dominance,” he explained. “The 2010s were clearly dominated by the tech sector, and this is still a theme in the market more than ever in 2020.
“[But] tech has probably grown too much [in] attention until now which has left US neglecting some areas and – maybe – the next big innovation, which could be climate change and all that is done in the field of renewable [energy].”
And although the multi-asset team remains positive on US equities, it finds more interesting opportunities in other markets. 
“Other markets are clearly catching up, other markets have done a better job also from an economic perspective with regard to innovation which will support the equity market in the next decade,” said the strategist. “Maybe ‘green’ is going to be the new tech in 2020 and beyond; that’s definitely something we are looking at going forward.”
Greater fiscal activity in Europe in recent years has been focused on green initiatives, said Juvyns, while the region’s equities do not have the same valuation headwinds that face US companies.
It’s not just Europe, however, as emerging markets are increasingly becoming centres of green innovation, such as China, which is a key player in renewable energy technology.
Juvyns (pictured) said while tackling climate change will be a costly enterprise in the short term and could impact economic growth, there will be long-term benefits, particularly given the size of fiscal stimulus packages.
He explained: “At the end of the day, we are going to see massive fiscal, so clearly this is going to lift growth potential in the meantime.
“Embracing the climate transition by policymakers is not something which will come at a loss, we could even very rapidly see the benefit of it in terms of additional growth for the global economy.”
There is the potential for an inflationary impact from targeted fiscal stimulus if authorities plan to make sure that carbon prices reflect the negative effect in the future, said the strategist, but less carbon-intensive producers are becoming cheaper and could restrict the impact.
He added: “If we want it or not, climate change is happening. It is difficult to assess the direct physical impact of it but climate policy will only increase going forward.
“This means more regulation and does mean higher carbon pricing going forward. So for investors… we need to look at the carbon intensity of our portfolios.
“It’s not about shorting fossil fuel energy vs being long-renewables. It’s looking at every sector at the relative advantage of companies which produces the same goods and services with a lower carbon intensity than another will have a higher, better margin and better performance.”