Financial board

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A flood of capital from government deficit spending effectively inoculated the U.S. against a recession that was once widely expected, says Morten Springborg, global thematic specialist with C WorldWide Asset Management.

Springborg said the liquidity backdrop improved dramatically over the past few years, supported by fiscal spending.

“Two years ago, the U.S. government was spending $300 billion a year on interest payments. Now it’s about $1 trillion. So that’s $700 billion more of interest payments to holders of U.S. government debt,” he said. “That’s a huge bonanza for holders of debt.”

He said liquidity has flowed into private companies and equity markets. The big capital swings in the global economy have been a boon to capital goods companies and conglomerates like Germany-based Siemens AG, France-based Schneider Electric, Japan-based Keyence Corporation, Ireland-based Eaton Corporation and Wisc.-based Rockwell Automation.

Springborg said 2024 has been “surprisingly positive” for equity markets, especially given the widespread belief as recently as a year and a half ago that an economic downturn was highly likely.

“Gradually, markets have been pricing in a reduced likelihood of a broad-based recession,” he said.

He said rising investment themes have created “pockets of growth” in a number of sectors.

“There is a tremendous amount of investment opportunities in our fast-changing world,” he said. “Companies that are exposed to these pockets of growth, thematically supported stories, will see earnings growth.”

Among those themes is supply chain restructuring and manufacturing reshoring, a trend that is expected to transform national economies for the next couple of decades.

“The movement of manufacturing capacities, primarily away from China towards other emerging markets or to the U.S., is one of the reasons why we have not so far seen a recession in the U.S.” he said. “The manufacturing construction market in the U.S. is extremely hot. So much activity is going on because companies want to diversify their supply chain risks.”

Another theme is weakening currencies around the globe, driven in part by rampant fiscal spending.

“We live in a world where we are seeing a tremendous growth in debt, which will lead to a need for debasement of currencies,” he said. “The value of our fiat currencies — no matter whether it’s euros, or yen or USD — is deteriorating day by day. So you need to allocate your investments to areas that are not affected by the debasement of nominal assets like currencies.”

Gold prices have risen lately, as has demand for commodities. And equities are likely to be supported by a recognition among investors that investments will not produce a real return if they are in nominal assets.

Springborg also pointed to rising themes in emerging markets.

In Brazil, for example, approximately 50% of the population has no access to official banking.

“That is a strong growth driver for banking services and financial services,” he said.

Similarly, Indonesia has low penetration in insurance markets.

“Indonesia has 2% insurance premium to GDP penetration,” he said. “That can go up five to 10 times over the coming decades and it’s a secular growth area. So, there are so many uncorrelated pockets of growth around the world that we can allocate capital to.”

And while allocation to select equities holds promise, he said it likely won’t be a smooth ride.

“I think we are going to see more volatility in equity markets,” he said. “Our strategy to survive that volatility is to stay in pockets where we see strong secular growth.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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