Jay Pelosky
In 2024, the watchword in the financial markets was “American exceptionalism” as the US economy and markets left the rest of the world in the dust. But as the calendar turns, perhaps now is the time to remove those geographic blinders and consider the larger regional competition that is likely to reshape the global economy in the coming years.
We may be in the middle of a long-term global growth cycle, driven by increased competition in the critical areas of artificial intelligence, green technology and security between the world’s three dominant regions: the Americas, Asia and Europe. (This is what I call the Tripolar World.)
The world economy has arguably been moving towards greater regional integration since the late 2010s, when globalization stalled in the wake of the global financial crisis and nationalism was undermined by the United Kingdom’s dismal experience following the 2016 Brexit vote.
The COVID-19 pandemic has accelerated this trend as supply lines have been disrupted and governments have realized that free access to medicines and vital goods is a national security imperative. This led to a shift towards “friend support” and “close support”. The share of U.S. companies planning to shorten their supply chains rose from 63% in 2022 to 81% in 2024, according to the 2024 Bain Resiliency Survey of 166 CEOs and COOs.
THE RACE BEGINS
This move toward greater regional integration means that rather than relying on one dominant market for green technology, artificial intelligence, and security, all three regions can pursue industrial policies that support investment in these areas (e.g., semiconductor foundries or “fabs” , batteries and electric vehicles). factories, defense industrial readiness initiatives, etc.).
China is already leading the way in its industrial policies around green technologies, which will account for about one-third of clean energy investment globally in 2023, according to the IEA. As a result, they now dominate much of the clean energy sector, from solar panels to batteries to electric vehicles. And Beijing appears to be using the same playbook to compete in artificial intelligence as it seeks to develop its own semiconductor industry and reduce its dependence on the US.
Along the way, China has strengthened its ties with Southeast Asian countries (ASEAN), which together became its largest trading partner in 2020, eclipsing the EU and the US.
The U.S. has also moved aggressively toward industrial policy under the Biden administration, with major legislative efforts including the Chip and Science Act, which allocated about $53 billion to support semiconductor chip production; a bipartisan infrastructure bill that has already announced more than $500 billion in funding for projects; and the Inflation Reduction Act, which stimulated massive private sector investment in green technologies.
Today it is Europe that needs to catch up and catch up quickly. Germany is once again Europe’s sick man, facing stagnant economic growth and its vaunted auto industry stuck in neutral. Germany’s financial prudence is the main reason for this problem, namely the lack of investment in the country in recent decades, but this prudence may be part of the solution. With a debt-to-GDP ratio of around 63%, well below the EU average, Germany has plenty of fiscal room to act.
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So what does this Tripolar shift mean for investors?
First, it means there could be many drivers of global growth originating outside the US in the coming years.
The US stock market has been the undisputed world leader since 2009. But US exceptionalism is already reflected in the price of the dollar, US stocks and, as a result, record valuation spreads between the US and other developed markets. American stocks have shown returns of +20% for two years in a row. History shows that we should not expect the third.
Because US markets are designed for perfection, even a modest change in investor expectations or economic fundamentals can cause investors to rethink their heavy exposure to the US.
And this catalyst could be the new US presidential administration.
Once Donald Trump takes office, his economic agenda could be stymied by a combination of inconsistent policies, divergent views among key members of his economic team and a slim Republican majority in Congress.
Meanwhile, the other two major regions will not stand still.
Over the past year, China has introduced a series of monetary and fiscal stimulus measures to combat deflation and the risk posed by Trump’s threat of tariffs. Beijing is expected to add to the cocktail at the upcoming National People’s Congress in March.
Europe, also facing a tariff threat from its main export market, could see Germany – its largest economy – finally ease its debt brake and use fiscal stimulus to combat domestic stagnation.
Consequently, we expect both global growth and a global equity bull market to expand geographically over the next year. While the US is likely to remain the powerhouse, investors may find that it’s not the only game in town.
(Jay Pelosky is the founder and global strategist of TPW Advisory, an investment advisory firm based in New York. Jay is the creator of the Tri Polar World (TPW) system and the Global Risk Nexus (GRN) system.