Author: Jay Pelosky
In 2024, the buzzword 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, now may be the time to remove these geographic curtains to consider the greater regional competition that is likely to reshape the global economy in the coming years.
We may be in the midst of a long-term global growth cycle fueled by increasing competition in the critical areas of artificial intelligence, green technology and security between three dominant regions of the world: the Americas, Asia and Europe. (This is what I call the Tri-Polar World.)
The global economy has arguably been moving towards greater regional integration since the late 2010s, when globalization stalled after the global financial crisis and nationalism was undermined by the UK’s dismal experience after the 2016 Brexit vote.
The COVID-19 pandemic has provided a tailwind to this trend, as supply lines have been seized and governments have realized that unimpeded access to medicines and vital goods is a national security imperative. This resulted in a shift to “friendly support” and close support. The proportion of US companies planning to shorten their supply chains jumped from 63% in 2022 to 81% in 2024, according to the Bain Resiliency Survey 2024 of 166 CEOs and COOs.
THE RACE HAS BEGUN
This move towards greater regional integration means that instead of 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 (eg semiconductor manufacturing plants or ‘factories’, batteries and electric plant vehicles, defense industrial readiness initiatives, etc.).
China has already led the way in its industrial policies related to green technology, accounting for about one-third of clean energy investment worldwide in 2023, according to the IEA. As a result, it now dominates much of the clean energy sector from solar cells to batteries and electric vehicles. 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 reliance on the US
Along the way, China 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. is also moving aggressively toward industrial policy under the Biden administration, with massive legislative efforts including the Chip and Science Act, which allocated roughly $53 billion to support semiconductor chip manufacturing; the bipartisan infrastructure bill, which has already announced more than $500 billion in project funding; and the Inflation Reduction Act, which spurred massive private sector investment in green technology.
Today, it is Europe that needs to catch up and quickly. Germany has once again become the sick man of Europe, facing stagnant growth with its vaunted auto industry stuck in neutral. Germany’s fiscal rectitude is the main cause of this problem – that is, the lack of investment in the country in recent decades – but this prudence could be part of the solution. With a debt-to-GDP ratio of around 63%, well below the EU average, Germany has enough fiscal space to operate.
OVERWEIGHT
So what does this tripolar shift mean for investors?
First, it means that there could be more drivers of global growth in the coming years outside the US
The US stock market has been the undisputed world leader since 2009. However, US exceptionalism is already reflected in the price of the dollar, US stocks and the resulting record range of values between the US and other developed markets. US stocks have already returned +20% for two consecutive years. History tells us that we should not expect a third.
With US markets hailed as perfect, even a modest shift in investor expectations or economic fundamentals could prompt investors to reconsider their high exposure to the US
And that catalyst could be the new US presidential administration.
Once Donald Trump takes office, his economic agenda could be hampered by a combination of incoherent policies, divergent views among key members of his economic team and a thin Republican majority in Congress.
Meanwhile, the other two major regions will not rest.
China has announced a series of monetary and fiscal stimulus measures over the past year to combat deflation and the risk posed by Trump’s threat of tariffs. Beijing is expected to add this cocktail at the upcoming National People’s Congress in March.
Europe, also facing the threat of tariffs from its biggest export market, could see Germany – its largest economy – finally soften its ‘debt brake’ and use fiscal stimulus to combat domestic stagnation.
Consequently, we foresee a geographical expansion of both global growth and global capital markets in the coming year. While the US is likely to remain a powerhouse, investors may find that it is not the only game in town.
(Jay Pelosky is the founder and global strategist at TPW Advisory, an investment advisory firm based in New York. Jay is the creator of the Tri Polar World (TPW) framework and the Global Risk Nexus (GRN) system.)
