US exceptionalism is the only game in town

Shuli Ren, Bloomberg

Investors naturally worry when a trade gets crowded.

The dollar and US stocks have benefitted tremendously from recent global portfolio inflows. As of June 2023, the latest data available, foreigners owned a record 17% of US equities. In a poll Goldman Sachs Group Inc. conducted at its January conference in London, a whopping 58% of participants expected the US to be the top-performing market this year, with Japan notching a distant 13%. Last year, the US tech rally juiced returns at hedge funds across Asia.

But US exceptionalism, the notion that these American assets will continue to outperform, got a reality check last week when a little-known Chinese company created almost as powerful an artificial intelligence model as OpenAI at a fraction of the cost. DeepSeek has not only raised the question of whether Big Tech’s billion-dollar capital expenditures make economic sense, but prompted debate over whether global fund managers’ faith in the US is misplaced, especially since valuations are already at elevated levels.

Unfortunately, President Donald Trump’s new tariffs levied on Canada, Mexico and China over the weekend are putting to rest a healthy discussion over the sustainability of US stock and currency gains. Fear and flow now matter more than price-to-earning ratios.

From interest-rate differentials to relative fiscal robustness, many factors can influence foreign-exchange moves. But when the world is engulfed in a trade war, the dollar becomes a one-way bet that Trump’s tariffs could harm other economies a lot more than the US.

Anyone who naively believed that tariffs were just a negotiation tool is disappointed. Trump’s opening shot was fired less than two weeks after he took office. It’s also much broader in scope. Collectively, Canada, Mexico and China account for 43% of goods imports into the US, roughly three to four times the size of the original 25% imposed on Chinese imports in 2018, according to Capital Economics.

An equally important question to ask, according to Gavekal Research’s Louis-Vincent Gave, is, if not US exceptionalism, what will be the market’s next driver?

There’s really no big catalyst elsewhere. Those hoping for a bazooka from Chinese President Xi Jinping might have to wait for a long time. China has been talking about stimulating the economy since late September, but words have not been matched by deeds. Local government spending, an important contributor to the economy, has been lacking. Fiscal health aside, officials dare not act because of Beijing’s unrelenting anti-corruption drive and civil servant pay cuts.

By comparison, the US might be the only large market where investors can expect big policy windfalls. Its exceptionalism, according to Goldman Sachs, is in part due to the magnitude of corporate investments. The $100 billion Stargate project that Trump announced to build infrastructure including data centers for OpenAI will keep capital spending elevated. Meanwhile, tariffs could help offset the cost of tax cuts, which tend to please stock investors.

No doubt, on the world stage, Trump is an aggressive bully who doesn’t care about allies or foes. But he is able to back up his harsh rhetoric and deeds with a strong US economy. Ultimately, global investors’ faith in American exceptionalism is a capitulation and a snub to Xi’s vision of an equal and orderly multipolar world.

[Abridged]

Courtesy Bloomberg/Shuli Ren