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Matt Clark

Market Outlook

ACWI ex-US Outlook

Outlook
14 January 2025

By

Portfolio Manager, TT ACWI ex-US Strategy; Co-Portfolio Manager, TT Global Smid-Cap Strategy

Latest ACWI ex-US economic and market outlook. 

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We have now reached a point where the strength of US equities and the dollar relative to the rest of the world appear extreme. Whilst we understand the reasons for this divergence, we do see potential for a partial reversal of these trends, particularly if there is a convergence in growth expectations between the US and the rest of the world. At this stage that is a contrarian view, but there are good reasons to believe it is possible. The US has benefited over the past few years from far more aggressive fiscal spending than in Europe and the UK, which has seen its cyclically-adjusted deficits widen to a much greater degree. US consumers have also run down their savings far more rapidly than those in Europe and the UK. Much of the positive US growth differential has stemmed from these factors, but clearly they cannot continue indefinitely. Meanwhile, there are several potential sources of positive surprise in Europe, including a removal of the German debt brake, or an end to the war in Ukraine. It is also important to note that Europe suffered far more than the US during the energy crisis following Putin’s invasion. Regardless of whether the war can be brought to an end, energy now seems to be very well supplied, so Europe should benefit disproportionately from ongoing normalisation here. Europe has also suffered more acutely from the higher rate environment as a far greater proportion of its debt is floating rate. Thus, any further cut rates should have a quicker and more significant impact in Europe. Finally, it appears that the Chinese authorities are belatedly realising the seriousness of the problems facing their economy and the additional risks that an adversarial US president poses. Whilst our longstanding concerns around China are unchanged, namely excess debt, deflation, demographics and geopolitics, the likelihood of further Chinese stimulus would seem to be increasing, which would generate a positive growth delta for many economies outside the US, most notably in Asia. 

From a thematic perspective, we remain particularly bullish on AI. Hyperscalers such as Google and Microsoft are still increasing their investments in AI, and we are confident that this will continue for several reasons. Firstly, the models are still scaling, and are becoming increasingly useful in the real world as they do so. For example, improvements in models are now allowing companies to create agents to perform tasks that can replace humans – so-called agentic AI. This should drive productivity gains, increasing the value of the models and justifying the hyperscalers’ CapEx. Secondly, there is an element of game theory here. For each of these companies, if they do not invest in AI, their core business could be disrupted. For example, Google’s search business could be particularly vulnerable to AI disruption unless it continues to invest. Crucially, not only do the hyperscalers have the need to invest in AI, they also have the ability. Despite record investment, they remain free cash flow positive, with net cash balance sheets. 

Important Information:
Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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