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Karen Karniol-Tambour: How Durable is the Economy?

In this article, Bridgewater’s three CIOs discuss why the economic expansion is likely to stay durable even as it slows, why a sustained expansion with central bank easing isn’t as good for assets as it might seem, and the opportunities they see. In addition, Co-CIO Greg Jensen recently attended Bloomberg for a discussion on many of these topics (see the video below).

Here are the key takeaways:

Economic and Market Observations

  • The economic expansion appears unusually durable, with spending driven by income growth, government borrowing, and business cash reserves rather than new private borrowing.
  • Central banks are easing preemptively despite inflation still above targets, supporting the expansion’s durability.
  • However, this environment may not be as positive for asset returns as it seems, given high equity valuations and an inverted yield curve.
  • Inflation is likely to remain above target longer than expected, making it challenging for central banks to ease as much as markets anticipate.

Investment Implications

  • Equities look marginally more attractive than bonds, but portfolios are already heavily positioned in equities.
  • Opportunities exist in:
    • Adding investments that can perform well in economic downturns
    • Shifting to regions with different economic cycles (e.g., large Asian markets)
    • Earning equity risk premiums more efficiently
  • Alpha generation is important in this environment, with opportunities in currency and bond markets, as well as within equities due to low cross-company correlations.
  • Key research areas include AI impacts, inflation trends, central bank policies, and political changes affecting economic outcomes.

In the equity markets, correlations across stocks are low, reflecting large divergences across companies exposed to different aspects of the economic machine. Companies we see as likely to outperform include AI beneficiaries with “winner takes all” dynamics, value laggards with large risk premiums and pressure for the gap to close, and past underperformers where moves look overdone.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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