LIVE MARKETS-The case for a return to US outperformance

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THE CASE FOR A RETURN TO US OUTPERFORMANCE

You may have seen just one or two headlines exploring the end of the period of U.S. exceptionalism which dominated markets for the last few years.

Certainly there's some serious rebalancing going on, but Citi FX analysts have a note out offering the case that the move out of U.S. assets is temporary not permanent.

First, they say, in the past 30 years, the only relatively long-lasting period of rest of the world earnings outperformance was during the middle of the first decade of this century, a result of China's entry into the WTO and the collapse in European peripheral bond yields after the creation of the euro.

And while Europe will spend more on defence in the coming months, and China's going to do a bit of stimulus, Citi says that neither compares to the situation 20 or so years ago.

On the other hand they say "the U.S. continues to have better demographics, rule of law, a consumer that remains resilient through numerous “once in a lifetime” crises (GFC, COVID, etc), and a more insulated economy."

And on top of that they expect tariffs and trade negotiations to become a smaller focal point for markets, with tax cuts and deregulation supporting growth in 2026.

As a result "this could lead to cyclical return towards US assets and the dollar" they say, adding they expect euro/dollar to peak this year rather than continue its passage higher on a sustained multi-year trend.

(Alun John)

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