Jonathan Birtwell explains why he and the Agile team are looking to Europe and Asia for fixed income opportunities.
Video transcript
So as global investors reevaluate their asset allocation and look elsewhere for opportunities, we think they'll likely end up looking more towards Europe and Asia.
Everything starts with our macro view, and our macro view right now is that there's been a reevaluation of this theme of American exceptionalism that has generally been a one-way trade post-global financial crisis, which obviously really accelerated post-Covid. And that broader market theme of American exceptionalism has led to a number of different things. One, equity multiple premiums versus like-for-like security. So for example, if you were to look at a Canadian security with the same earnings, the same growth potential and compare that to the same US-based stock, the US is going to trade at a premium to that Canadian security just because of that exceptionalism premium. Right?
We also have seen historically tight credit spreads, which talked about earlier and a dollar that was between, depending on how you look at it, 20 to 30% overvalued. So as global investors reevaluate their asset allocation and look elsewhere for opportunities, we think they'll likely end up looking more towards Europe and Asia as those economies are poised to outperform the US over the next several years.
Why do we think that's the case? It's very simple, liquidity. And I hate to be the guy that drops a Stan Druckenmiller quote, but he really did say it best as it relates to this point. "Earnings don't move markets. Liquidity does." If you think back to 2019, the US had an annual deficit to GDP of about 4% and that is widened to almost 6.5% today. The US is basically out of fiscal space where the spending needs to slow dramatically to avoid some pretty nasty long-term consequences.
So if you look at the rest of the world, while most countries have healthy deficits, no one is near the US in terms of their deficit to GDP, and the current US administration has made it very clear to the world that there's no interest in the status quo. Therefore, you're seeing countries like Germany, France, China all signal to the market that they're willing to increase government spending while the US is curtailing that spending.
Pick a specific example, like Germany. Germany has historically run the tightest developed market deficits to GDP and they recently announced to the world that they're going to spend 500 billion euros on the re-industrialization of the German economy. Just to put that number into perspective, that's nearly one and a half times what the US spent in relative terms on Covid relief. So the moral of the story is Agile's allocating assets where we think the market will compensate investors most, countries like Germany, Australia, Indonesia, who all stand to benefit from this fiscal expansion we've been talking about.