After a long period of US exceptionalism, head of global macro strategy at Brandywine, Paul Mielczarski, said his firm expects significant convergence in relative growth rates amid a macroeconomic landscape “fraught with peril”.
“Global investors are structurally overweight US dollar-denominated assets, and we believe there are both economic and geopolitical reasons for reducing these exposures over time,” he said.
After the first quarter gross domestic product turned negative and trade policy uncertainty weighed on growth prospects, Brandywine said it expects US growth to decelerate significantly in the second half of the year, citing the tax-like impact of tariffs, trade policy uncertainty and depressing investment and hiring.
Lower immigration, a decline in international tourism and federal workforce lay-offs may further impede economic activity, according to the firm.
In what the firm has coined the “Great Expectations Reversal”, it anticipates a strategic pivot away from overvalued US markets towards undervalued international opportunities.
Mielczarski pointed to multiple crosscurrents affecting the US bond market, which are, for now, balancing each other out.
“On one hand, the US economy is gradually slowing down. On the other hand, additional US fiscal easing at a time when the government debt level is already high is pushing bond yields upward,” he said.
However, despite a recent reprieve in tariffs, he believes the trade war is “far from over” – anticipating that tariff rates will eventually settle at significantly higher levels than before the Trump administration took office, which is likely to result in increased inflation and slower economic growth.
“Faced with stagflationary risks, the Federal Reserve (Fed) is likely to be cautious in reducing policy rates,” he said.
Investors would be wise to look beyond the US, said Sorin Roibu, portfolio manager and research analyst at Brandywine.
He identified Europe as an emerging standout due to Germany’s substantial multi-year fiscal stimulus package, which is aimed at defence and infrastructure spending.
He also drew attention to the attractive valuations and resilient labour markets in the region. European banks have seen exceptional returns, with some experiencing gains of 35 per cent to 45 per cent year to date.
Meanwhile, emerging markets expert at Brandywine, Carol Lye, added that despite general uncertainty in the economic landscape, emerging markets have performed well this year.
“Local currency markets are up over roughly 10 per cent and hard currency sovereigns and corporates have returned just over 4 per cent and 3 per cent, respectively, for the year to date,” she said.
She said aggressive trade rebalancing, combined with cyclical and structural shifts, could further expand opportunities in emerging markets, with some economies well-positioned to benefit from a secular shift in global production and capital flows.
“US policy aimed at curbing state-subsidised overcapacity may accelerate the relocation of supply chains toward other markets, including emerging markets,” she said.
“This trend could invigorate investment opportunities in infrastructure, local manufacturing and upstream commodities across Asia, Latin America and Africa.”
Lye identified Latin America as a region with exciting opportunities due to its appealing nominal and real yields. She said Brandywine will be monitoring the region’s extensive election calendar in the hope of a shift towards more centrist candidates to reinforce investor confidence.
Central European markets are also worth watching, according to Lye, as they stand to gain significantly from an end to Europe’s recent economic stagnation.
Roibu added Brazil and China – particularly in companies benefiting from AI – to the list of markets to watch.
At the same time, Mielczarski said there is still uncertainty surrounding the US economy’s future and what this means for investors. A key question for him is whether the current growth weakness is enough to prompt a more aggressive Fed policy easing cycle, especially given the risk of short-term inflation.
“A further sell-off in the USD may require definitive evidence of a deterioration in US economic growth,” he said.
