Ten Cap’s Jason Todd is withholding judgement on whether the US exceptionalism narrative has lost its edge, or if the case for maintaining a strong allocation to the world’s largest economy still holds.
“I do not know if US exceptionalism has ended or whether ex-US asset allocation is suddenly more appealing,” Todd said in a recent market outlook. “Only time will tell.”
What’s clear, according to Todd, is that the US continues to host the world’s largest pool of high-quality growth companies, commands a dominant lead in corporate profit margins, and sustains a flexible economy despite ongoing policy uncertainties.
According to the CIO, a market doesn’t need to be exceptional to draw or repel capital; rather, it all comes down to how it’s priced.
“President Trump is not forever and perhaps fears around the US will also prove less permanent, even if there is no longer the same level of trust in the US political/policy system,” he said.
“But regardless, at around 50 per cent of global market cap, a diversified portfolio cannot afford to not be there. But of course, the right price helps.”
Still, the looming question of a potential recession in the US remains unresolved. While Todd believes the tipping point hasn’t been reached yet, he warns that as policy and trade uncertainties continue to mount, it will become increasingly difficult for the US economy, and risk assets, to recover.
“Equity investors will need to endure more volatility, more uncertainty and more pain unless the trade war can be neutralised.
“At this stage, markets are not pricing in recession and neither should they,” he added.
“The growth outlook has weakened drastically, but recession is still a relatively ‘even’ bet amongst most sell-side firms.”
Moreover, while there has been a meaningful increase in US inflation expectations, Ten Cap’s CIO doubts this would act as a constraint for the Federal Reserve if growth concerns spike.
According to Todd, this creates a challenging investment landscape, where the market’s fluctuating risk-on, risk-off dynamic makes it increasingly difficult to pinpoint optimal positioning.
“We know we cannot outfox President Trump or think we have some unique insight into what is around the corner, but at Ten Cap, we are reluctant to jump on the bandwagon calling for an end to US exceptionalism as a structural shift and the need to dump US dollar assets,” Todd said.
He, however, conceded that some segments of the market show concerning symptoms, including the underperformance of US markets relative to the rest of the world, a sell-off in the US dollar and rising long bond yields, all while risk aversion continues to climb.
Ultimately, the CIO emphasised that the focus should not solely be on the “risk-on” or “risk-off” dilemma, as there are other positioning options available to investors.
“We think data is supporting a tilt somewhere left or right of centre depending on whether you are a pessimist or optimist. That is pretty neutral territory, and to be honest, I do not think that straddling the middle ground is a particularly bad place to be when outcomes remain binary and the cost of being wrong is high,” he said.
Ten Cap’s Alpha Plus Fund posted a sharp 5.7 per cent decline in March, underperforming the broader market as the ASX 200 Accumulation Index shed 3.4 per cent after a “modest” risk-on position proved mistimed.
At the time, lead portfolio manager Jun Bei Liu noted that market volatility remained elevated in March, with indices continuing their decline from late February – leaving several key holdings in the Alpha Plus Fund particularly exposed to the broader sell-off.
“Several of the portfolio’s higher-quality, global growth exposures – historically among our strongest contributors – were disproportionately affected by the sell-off,” Bei Lui said.
Looking forward, she said the market is observing a “cage fight to the death”.
“Either Trump gets his way, or Trump gets his way,” she said. “There is no alternative other than how outcomes could be softened either via negotiation or Fed policy easing. We have little transparency on either.”
