We wrote two weeks ago about the North American economy. As we have mentioned in previous issues of the Investment Outlook, this is one the few periods in my career where there has been real economic diversification between the major economic zones of the world, namely (in order of size): North America, China, Europe and Japan. Generally, the global economy moves in tandem with the United States, as its cooperating partners settle into the role of importing raw materials, running them through factories and plants and then selling the finished goods back into developed markets. For decades, this globally symbiotic process has worked very well for investors, providing generally steady returns. COVID, we believe, threw a serious wrench into that system, and now geopolitics seems to be exacerbating the situation as well. The fall on effect is that there has been and continue to be large structural forces that influence the world in different ways. Each part of the global economy seems be experiencing those situations at different times, hence the regional diversification. Recent uncertainty with respect to the new US administration (i.e. potentially excessive tariffs degrading into trade wars) provides a set up that could create alarming news headlines, but provide significant opportunity at the stock picking level.

• As we mentioned in the Outlook Edition 33, North America seems to be in good shape. Inflation & unemployment are low, and the US Central bank has been accommodative. The real issue is will “they” be able to stick a soft landing. We are unsure given a new government but most of our large capitalization mandates are allocated to companies that do business in the US. It continues to remain our biggest weight.
• Europe is in a different situation and somewhat more depressed. Inflation has decreased in the United Kingdom and European Union. Both central banks there have dropped administered interest rates and there was a note today about another potential 50bps drop. Growth and expectations from company managements continue to be quite low and data released today showed further deterioration. Management outlooks have never really recovered from their peak before COVID, and we do not really see a catalyst that can change the situation in the medium term. Our exposure in Europe is limited to those well-run companies that are selling globally (i.e. most of their revenue comes from outside the EU).
• China continues to have difficulty. It is probably in a period of deflation and in need of some major government stimulus to pull the economy out of its malaise. However, the government there is also worried about over stimulation, which could create too much inflation. We have some exposure there, but are waiting for material change to significantly increase the companies we own. There are many cheap opportunities, but it could remain that way for some time.
• We previously discussed Japan here. We have investments there and continue to look for good additions.

“This means that” there are great opportunities to position the portfolios in companies that are focused around the world, but we also cannot ignore the geopolitical risk and trade war potential that are now higher than before.