“The unwinding of “Trump trades,” a spike in volatility and the outperformance of European versus US equities have sparked debate about whether this is a tactical shift or the beginnings of a longer bearish trajectory for markets. We think that the market shift is tactical, not strategic, in the sense that it mainly represents the unwinding of an unusual degree of consensus, e.g. with respect to the US versus Europe and the growth/mega-cap trade. The unprecedented size of the flows going into this current episode implies there may be more rebalancing to come. However, we do not believe that this marks the end of strategic US exceptionalism, which is driven by deeply ingrained forces. Investors have perhaps been complacent about volatility and need to position for it to be persistent, given high valuations, market concentration and a highly uncertain policy environment. In addition, the tactical earnings outlook in the US is meaningfully lower. Nevertheless, we think it remains appropriate to have a positive view on equity returns for the year. The view that this shift is a tactical rebalancing is still consistent with recognizing the momentous scale of the geopolitical repositioning we are witnessing.”
Morten W. Langer
