The theme around a pre-election boom leading to policy divergence and currency volatility seems to be gathering momentum, and markets are picking up on it. In short, a pre-election economic boost in the United States could set the stage for a divergence in growth and inflationary trends compared to other major economies over the next year. Heavy deficit spending and other fiscal stimuli will likely start having an impact during Q2 2024 in the US. This could likely push economic growth well above trend temporarily and widen output gaps, resulting in reaccelerating inflation.

Meanwhile, China’s economy appears to be sliding into a balance sheet recession and prolonged slump just as Europe struggles with overregulation, flawed policies, and reliance on external demand drivers. Japan’s economy is also now contracting even amid rising inflationary pressures due to declining productivity and labour force shrinkage. In essence, the major economies outside of the US seem ill-equipped to handle the higher interest rates the Federal Reserve may need to implement by 2025 to combat rising inflationary pressures brought on by pre-election stimuli. This expected policy divergence could end the de facto US dollar standard that has persisted for decades.

With the US potentially moving in a very different direction than Europe, China, and Japan, currency volatility seems poised to surge after years of abnormal stability. The US dollar would likely strengthen considerably through 2025, weighing on European and Japanese currencies as well as on dollar-denominated commodities and emerging markets.

In this environment, Andrew suggests safe havens may exist in US equities and Japanese equities. One of these is supported by valuations and the other very much not. So we will have some work to do on that. However, his proposition is that faith in the US rally may overcome economic uncertainty given views that policymaker support and liquidity tailwinds will also continue driving markets. In Japan, low rates and ongoing quantitative easing provides a supportive backdrop for equities despite being in a technical recession.

On the other hand, China's growth plays seem poised for pain. Its economic slump reverberates globally, harming trade partners and commodity prices alike. Providing a potential hedge, winners over the next year could include assets levered to a strong US dollar relative to the euro and yen as well as inflation-resistant assets during this policy divergence. But ultimately, markets seem headed for a volatile back half of the decade as the tides turn.

All of this seems highly germane to Australia and not just from a commodity perspective. These divergent trends he talks of would lead to higher currency volatility by late 2024 and currency volatility always has an impact on Australia, on both sides of the ledger. It looks like we will also be spending some time talking to Andrew about how this thesis plays out in Australia, particularly given our lop-sided share market and increasingly polarised spending patterns. And that’s before we get onto the property market …

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