Welcome to this special podcast from Standard Chartered, supporting clients for over 150 years. Hello, I'm Manisha Tank, and on behalf of Standard Chartered, I'd like to welcome you to this unique podcast featuring the best of the bank's research and analysis. Over the next 20 minutes or so, we're going to take a swing at US exceptionalism at a time when US equities, US treasuries and US inflation all seem to be on the up and up.
As inflation rollout is picking up pace, US President Joe Biden is pitching to spend trillions more on the economy. But we live in a globalized world. So is it still the case that all hopes hang on the world's biggest economy?
What is the term US exceptionalism in today's world all about? And is it a big myth? So this came up in Standard Chartered's latest global strategy report for the second quarter coauthored by my panelists today.
Eric Robertson is dialing in from Australia. He's Standard Chartered's Global Head of Research and Chief Strategist. Eric, how's it going?
Very well, Manisha. Thank you. How are you?
Excellent. And I hope you are too. And not far from me here in Singapore, Gosik Rudra joins me.
He's Global Head of Fixed Income Research and Head of Asia Research. Gosik, hello. How are you?
Doing very well. Thank you. And you?
Excellent. And with that, let's get going. First, let's approach this as a concept.
Eric, when we talk about US exceptionalism, it's a term that isn't new. It goes back a long way. What are we really talking about, though, in the context of the second quarter of 2021, the second decade of the 21st century?
Yeah, sure, Manisha. Look, I think there's a couple of angles that are incorporated into that concept or that theme, the first of which is an economic one, which suggests that the US is outperforming most of the rest of the world from a growth point of view. The second angle is that US assets are outperforming their peers and competitors around the world, and we take issue with that in both respects.
I mean, number one, we're seeing very spectacular economic growth and an economic recovery in Asia led by China and a number of the other economies in the region. From an asset performance point of view, the US equity market is doing well, as you highlight, and a number of other equity markets are doing well in addition to that, and furthermore, although the dollar has recovered a bit over the last month or two, the dollar had started a fairly significant round of depreciation as far back as April of last year. So we would describe the global environment as one where the recovery is lifting many boats, not just the United States.
OK, and when we talk about US exceptionalism, Eric, how do we understand it in the most conceptual way? The key point to focus on is whether or not the forward outlook for the US economy is that much better from a variety of metrics, whether it's growth momentum, the health of the consumer, the health of the US government's balance sheet. I guess a key point in this particular cycle is that yes, we're seeing a fairly spectacular recovery in the short term, but our view on a sort of two or three-year forward outlook is that the US will revert back towards something along the lines of trend growth.
So yes, we're seeing a spectacular surge in the short term, but the question is around the sustainability of that growth. All right, so Gausik, let's take it to you. This idea of US exceptionalism, is it an idea that ruffles noses in Asia?
And if it does, why? Because as Eric has just pointed out, actually growth is happening in other places too. Absolutely.
I mean, I think that's spot on. Asia has led the whole recovery process this time around from middle of 2020. Number of countries, particularly in North Asia, actually led the charge.
China sort of achieved its end 2019 GDP levels sometime in the middle of 2020s. The discussion in China is very much about policy exit, whereas in most countries, I think they're very much entrenched in sort of the policy mix that we are seeing right now. North Asia also sort of recovered quite smartly and we've seen that.
I mean, we've seen this across in a number of places in Asia, I think. And if you look at it in the emerging market context, I think Asia has done very well relative to other regions. And I think that is sort of reflecting what we are seeing on the ground in this part of the world.
Now, when we talk about US exceptionalism or we talk about this concept of taper tantrum once again, there is no question, I think emerging market gets scared and emerging market gets hurt from that entire narrative, right? We have to sort of recognize Asia's performance in that context. Asia would have done a lot better had we not been sort of working with that sort of a narrative or that kind of a backdrop.
That clearly is a tough narrative to work for with respect to emerging market. But in that context, I think Asia has done phenomenally well. So on that note, I'm quite curious from Standard Chartered's point of view, how do you see the narrative then?
I think there are two aspects to it. There is the first aspect, as Eric highlighted earlier, we believe that global growth was subpar going into this COVID crisis. We did see, obviously, the shock impact the world and US has come out, I guess, with all guns blazing and has delivered on the policy front much more than some of the other parts of the world.
I think Asia, if you look at it by contrast, hasn't needed to do the same level of policy support because large parts of Asia did not get impacted the same way with this whole COVID crisis. So I think, obviously, it is a different approach because of what's happened. Now, the thing to keep in mind is if we do have this narrative, whether we like it or not, we have, obviously, market response, which is clearly tailored to that.
Now, this has impacted emerging markets, particularly the credit markets and local currency debt markets have got impacted by this narrative. That dollar, obviously, has strengthened off late and that has impacted the local currency debt space. On the credit market side, EM has underperformed versus the US credit markets.
Now, US credit markets, understandably, have performed very strongly. If you have this whole discussion of very strong economic stimulus and all of this reopening discussion that we are having from the US, I think US credit markets have understandably responded very positively to that and spreads are very tight. EM has lagged that move, but I think eventually, we do expect that to catch up, become equalized.
OK, so we have our eyes on the horizon then. So, Eric, let's get back to what's happening in the United States. There's a positive direction when it comes to vaccines.
Joe Biden wants to spend trillions more on infrastructure and the economy, which granted is a long term thing. What is that doing more widely for currency expectations? Obviously, there are expectations for the US dollar, but what further impact would it have amongst some of the more advanced economies?
This is a topic that we think is really important. If you look at the fiscal stimulus that the Biden administration passed early in the year, 1.9 trillion of fiscal stimulus, a large percentage of that was what we would describe as income supportive, which is a fancy way of saying putting money directly into consumers' pockets. And we saw previous examples of that last year.
Now, that has had a couple of important implications for the dollar. Number one, the budget deficit in the United States continues to get worse, which is a negative for the dollar. But in some ways, more profoundly for Asia and other parts of emerging markets, it also led to a surge in US consumer spending on imported goods.
And so the exports from Asia and the exports from some of the other key trade dependent economies around the world did very well as a spillover from that US fiscal stimulus. So again, this is another reason why we think that US exceptionalism is a somewhat misleading term. From a purely currency point of view, I would also highlight that even over the last month or two when the dollar traded a little bit better, the currencies of Asia, especially North Asia remained remarkably stable.
And so what we would highlight is that those currencies that had either a strong linkage to global trade and therefore exports or those currencies heavily dependent on the commodity space were able to stay fairly stable even while the dollar was rallying against some other currencies around the world. So some of these US policies are good for the external environment as well as the domestic environment. Okay.
Let's talk a little bit further about the domestic environment amongst some of these Asian economies. We have spoken in the past about China and what's been fascinating is the way China has responded to the crisis over the last year, particularly when it comes to monetary policy. Perhaps walk us through it and there's such a level of sophistication there, isn't there?
I think that's right. I think a little bit of historical context is important. In some of the previous crises that the global economy or global markets have experienced, China's response has typically been to inject a significant amount of monetary stimulus and excess liquidity into the system knowing that that would help stabilize global markets and the global economy.
That has unfortunately led to quite a bit of imbalances in China's own markets which they then had to work to unwind. This time around, China was very deliberate, very measured with the amount of liquidity they provided to the domestic economy. In our opinion, that means they won't go through some of the sort of monetary hangover that they've experienced in the past and furthermore, fiscal stimulus has been extremely targeted this time around.
Infrastructure spending, fixed asset investment and related sectors have derived quite a bit of benefit from the fiscal stimulus but again, I think this combination of monetary and fiscal policy in China has been geared towards a more sustainable recovery over the medium term and I think that will be an important anchor for the rest of Asia as well. Absolutely. I think another thing that's very interesting of course about China is we can't ignore the fact that China has a very long term plan.
We know very far in advance what is likely to happen. How does that make dealing with a strategy outlook, for example, when you're looking at China? I would imagine that that's a completely different game.
I'm quite curious. If you think about monetary policy in China and some of their financial objectives, whether it's how they think about their currency, how they think about attracting international capital to their domestic bond markets, stability is always the operative word. They want a stable currency because they know for international investors, a stable currency is a prerequisite for being able to invest in the onshore market.
We have noticed this year that even as developed market bond yields went up by as much as a hundred basis points, China's bond yields were extremely stable and so to your point, when they think about a two, three, five year plan, their number one objective is stability. Their number one objective is the stability that that implies for their domestic markets and their ability to fund or finance their longer term economic aspirations. So that's kind of a key difference that reflects their own policies.
And just picking up on the China story, Gosik, let's take it to you. The China story must be very important for other emerging markets. Perhaps you can walk us through how.
It clearly has implications for all markets in the region. As Eric highlighted, what China does has reverberations and sort of impact for the rest of the region very, very clearly. On the FX market side, for instance, I think the CNY has been a very important driver for sentiment and sort of performance of other currencies.
To the extent the CNY is stable, I think other currencies start trading with their own idiosyncratic biases. But to the extent the CNY comes under pressure, and there have been episodes of that over the last few, you know, last decade or so, we've seen EM currencies, particularly currencies from other parts of Asia, you know, get impacted much more significantly. And I think that's something that we always track on a regular basis.
When you look at the credit markets of Asia, I think China has been a dominant force over the last decade. I think if I look back to sort of mid-2000s, China was a very small part of the bond markets in Asia and globally. And today, I think China is a very dominant segment of that market, probably contributing to about between two-thirds and three-quarters of the annual issuance from within the region.
So I think clearly it has very important implications for how the market is traded. On the local currency side, obviously it's a market that was relatively close to international investors for the most part till recently. Now with inclusion in indices and various official sector participants also getting involved in China, I think that's going to increasingly become a very important part of the index.
At the outset, it's obviously had an impact in terms of impacting some of the countries with rating changes, you know, for existing countries. But I think as we go forward, China is going to be a very important piece of international portfolios and I think that will make Asia a very important piece in global portfolios. I think sort of puts Asia much more on the global map on the fixed income side than it was before.
Yeah, and that's why it's just so valuable to have a view from Standard Chartered because it has quite a unique position in terms of its exposure in some of these markets. Let's bring it to talking about issues that came up during recent meetings involving the IMF and the recent IMF report because what it underlined to some extent, and let me take it back to you, Eric, was this really patchy outlook that we have in terms of risk, particularly to places outside the United States, particularly when it comes to things like vaccine rollout and how that's impacting upon the economic dynamics in the world right now. Given the perspectives that you have at Standard Chartered, Eric, what is it telling us?
What is the correlation between this rollout and your outlook? I guess a couple of things come to mind. You know, one of the themes that Kaushik and I and the teams have been writing about since April of last year, quite frankly, was that this COVID crisis and the recovery afterwards would create a bipolar world, in other words, a world of the haves and the have nots.
The way the vaccine distribution process is working is only exacerbating those differences. In other words, we do expect a very healthy global economic recovery this year, but our own forecasts, in much the same way as the IMF, suggest that that recovery will be highly uneven, again, reinforcing that notion of the haves and the have nots. Now, the one thing I think is really important to make clear is that it's not just a developed market versus emerging market differentiation.
In other words, even within DM, you're seeing clear dispersion or a widening of the gap between, say, the U.S. versus Europe or the U.S. and the U.K. versus Europe. Within emerging markets, you're seeing, in some cases, very successful COVID management and then very good vaccine distribution in some parts of EM and then real concerns and challenges in others. And so what I guess what our economic outlook really reflects, and again, it's very much echoed by the IMF, is that you're seeing relative value statements being made all over the globe.
In other words, vaccine performance correlated with economic performance, and then those countries or regions that are struggling economically tend to also be having some challenges on the vaccine front. So we're very concerned that over a medium-term, shall we say, two- or three-year time horizon, when global growth settles in to something resembling trend growth, that those countries which have lagged in the recovery may fall further and further behind. And I think from a policymaker point of view, that's something to really be mindful of.
Yeah, definitely. I mean, I'm curious on another level as well. When it comes to calculating risk, when it comes to looking at the horizon as an economist, as a strategist, that must be very challenging.
Well, yes, it is. And I guess what I would offer to you and to our audience is that the way we try and think about this in terms of devising our market views is we say, look, what is actually priced in by the market? And then what do we think the market may or may not be missing?
Another way of saying it is take the United States, for example. Most people, ourselves included, expect a very robust recovery in the United States this year. But as we've argued recently, we think a lot of that good news is in many ways already reflected in the price.
So the notion of risk management around our forecasts is really about understanding where we sit relative to the market consensus and understanding where those differences lie. Yeah, thanks for that, Eric. Gosik, let's talk a little bit more about vaccines if we can, because this must be proving to be quite a headache.
I mean, I'm thinking about the news coming from India right now, for example, having overtaken Brazil in terms of the number of cases of COVID-19. They've even had to stop exports of drugs like remdesivir just so that they can keep up with the problems that they're having at home. And then you hear the likes of Pfizer being the one to step into the breach when Johnson and Johnson is on hold and AstraZeneca is suffering from problems as well.
So, Gosik, that must have ramifications in some of the markets you cover. The vaccine dissemination has been a very uneven process. There were countries which had agreements in place.
But even there, I think emerging markets are going to have their challenges in terms of logistics, size of population, distribution, all of which will be pretty tough. The countries in Africa, obviously, which are primarily dependent on the COVAX scheme, which is a multilateral, obviously, facility. Now again, even in those countries, the best case scenario we're talking about is somewhere between 20, 30 percent of the population getting vaccinated this year, which really means that it's a 2022 issue before countries achieve a certain level of stability on the vaccine front or sort of on the COVID front, which allows these economies to start operating, which is why really what we've seen so far is emerging markets lagging this whole process right now.
For the time being, there are countries which are doing better. But overall, I think it's been very uneven. And certainly from EM perspective, the process is going to be slower than DM.
I think as we get into the second half of this year and into 2022, I think that's when we'll start seeing emerging market recovery take place. EM assets at that point will probably come to the fore and perform a lot better than they have so far. The other thing that a lot of people are thinking about is debt and how the debts are piling up.
Just a quick word, if you will, on how much of a risk there is there. Debt is a big challenge. I think EM countries, luckily, this time around versus say about 10 years back, were in much better shape fundamentally.
But clearly, I think there's been a huge debt buildup and it's going to impact perhaps the sub-investment-grade countries more than it will impact the investment-grade countries. I think the investment-grade countries can continue to issue in the market. But the economically weaker, lower rated countries will have to rely on multilateral assistance The SDR facility from the IMF is going to be very helpful from that standpoint.
But a lot of them obviously are also looking at the DSSI debt initiatives to get some sort of debt relief because this is something that will clearly help them from a medium-term perspective. They just can't pay that level of debt in terms of interest payments and this basically completely cripples them. So they will need some degree of debt relief.
And I think that's something that we will have to watch for. But clearly, I think this is a big challenge from a medium-term perspective for a lot of EM countries. Yeah, but it's a very different story, isn't it, Eric, for the United States?
I mean, anyone who decides to look up the US debt clock, it just doesn't stop ticking. There's no sign of relief in sight there. Who's going to pay these trillions of dollars?
Well, you raise a good point, Manisha. I mean, look, one of the advantages that the United States historically has is the US Treasury market is viewed as arguably the most liquid debt market in the world. It's highly rated.
There's an enormous amount of liquidity from all different types of participants. And so the US Treasury is able to increase the amount of debt issuance fairly significantly without necessarily destroying the market structure. But the second issue is what this increase in debt in the United States implies about, shall we say, the ability of the United States to attract foreign funding.
Now, some people will say, well, the US dollar is the reserve currency of the world. That's not a challenge. But I think we're starting to see some evidence that there is a decision that the United States will have to make.
If they continue to issue debt in the way that they are, at some point, either US interest rates will have to go a lot higher to attract foreign investors, or they'll have to sacrifice the currency. Our opinion is that when you get the Federal Reserve involved, the Federal Reserve will ultimately not want to see interest rates exploding higher. And so they'll try and keep interest rates relatively well contained.
But to do that, the dollar needs to weaken. And that really is one of the underlying pillars of our negative dollar view. And we know that the Fed is keeping things very, very close to the chest at the moment as well.
So that doesn't make navigating that story any easier. OK, let's wrap up this episode with a few last thoughts. You know, we started this conversation, Eric, talking about US exceptionalism.
Although I'm wondering how soon we'll be talking about China exceptionalism. What are your thoughts? I think the first thing we have to do is resist the temptation to make this a question of US versus China, and just look at what China is achieving on a medium-term economic point of view.
We are graduating millions of people from universities every year. Those people are going into the workforce. The workforce is expanding.
You're seeing China move up the value chain in terms of the quality of goods that it's producing. We're seeing the services part of the economy become a much larger percentage of the total economic pie relative to just basic manufacturing. So the diversity of China's economy is improving.
Two-thirds of global growth now comes from Asia, including China. And so I think we really have seen in many ways some of the early years of this evolution towards Asia, including China, being the engine of global growth. I think what we have to look forward to is a growing middle class and a growing consumer class.
We have to look forward to growing diversity of the services and consumer sectors in China, as well as some of the other economies of Asia. And so I think barring any financial accidents or any economic accidents, China's economy looks to be on a very steady state of growth of around 5% over the next two or three years at a minimum. I like this, what you're saying, talking about this evolution.
It really gives us a sense of where we might be some years from now. Finally, Kaushik, I wanted to get your view, of course. At what point do we see the markets that we talk about as being emerging markets today?
When do we see them pull away on their own growth superhighway? I think that's a very good point. I think there are parts of Asia which are clearly closer to embarking on that trajectory.
India is certainly one of those. But I think ultimately what we really need is for these countries to undertake some key infrastructure investments, which will allow these countries to get onto the next level in terms of growth. I think a lot of these countries, given their demographics, a lot of sort of supporting factors that they have in place, they grow at a reasonable pace even without doing anything.
And that sometimes makes them lazy. As Eric highlighted, I think Asia is in a good place. We're already contributing about two thirds of the global GDP from a contribution standpoint.
I think there could be other pillars that could come up if we can get the infrastructure game going. Yeah. Isn't it interesting, the point you make, you talk about getting the infrastructure game going when ironically that's exactly what Joe Biden is trying to do in the United States of America, the world's biggest economy at the same time.
So it just goes to show everybody should be doing it. This has been a really interesting conversation. Thank you both.
This wraps up the episode. And it just leaves time for me to thank you. First of all, Eric Robertson, who's been dialing in from Australia.
Thank you so much. Standard Chartered's Global Head of Research and Chief Strategist. And also Goshik Rudhra, Global Head of Fixed Income Research and Head of Asia Research.
It's been great. On behalf of Standard Chartered, I'm Manisha Tank. And goodbye.
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