US exceptionalism holds, but global rebalancing looms, warns elite JPMorgan team

Despite debates over the end of US economic dominance, for an elite team of CIOs, portfolio managers and strategists, there are risks for America’s world-leading position.

JPMorgan Asset Management’s Strategic Investment Advisory Group sees resilience ahead, even as some non-US developed markets improve. In its latest paper ‘Narrowing the gap: US exceptionalism & developed markets,’ the group highlights structural advantages that have sustained US growth, while noting areas where other economies are catching up.

Jared Gross, SIAG co-chair and head of Institutional Portfolio Strategy, has given InvestmentNews his take.

“What matters is not simply the US having the strongest fundamentals, but its relative position versus other major economies,” he says, pointing to the dollar’s reserve currency status, deep and liquid capital markets, a skilled labor force, a consumer-driven economy, energy independence, and stable policy as enduring pillars of US exceptionalism.

But if all that sounds unassailable, Gross cautions that the US’s lead is not guaranteed.

“Any significant narrowing of the gap could lead to capital flows shifting away from the US, with potentially profound consequences,” he warns.

Gross says there are three categories of US strengths to consider:  those likely to remain strong, those that may decline, and areas where other developed markets are improving. These include:

• US reserve currency status is unlikely to change anytime soon, given the dominant use of the dollar in trade and financial transactions. Further diversification of reserve holdings (Euro, Gold, Bitcoin) is likely, though the short-term impact would be marginal.
• The US labor market has benefitted from the ability to source non-native born works at scale. Changes to immigration policy – for both illegal and legal immigrants – could diminish this advantage.
• US capital markets remain the gold standard and are likely to retain that status in the future. Nonetheless, market consolidation and coordination in the European Union (EU), and the rise of investor-friendly corporate management in Japan, provide a boost that could improve their relative standing and increase capital flows in their direction.

Looking at what’s happening overseas, Europe’s long-term outlook, Gross notes, benefits from recent policy shifts.

“The effective removal of the fiscal brake represents a sea change in the EU’s attitude toward deficit spending and the use of the government balance sheet to finance growth,” he says, pointing to stronger banking systems, energy diversification, and cross-border consolidation as additional supports.

Japan, too, is showing structural gains.

“The current push to improve capital efficiency, increase board independence, and spin off subsidiaries can add a new dimension to the case for Japanese equities,” Gross explains. “If accompanied by capital repatriation and a stronger currency, the impact on asset prices could be significant.”

In emerging markets, China’s slowdown looms large but not uniformly negative.

“Investors have been underweighting or removing China exposure altogether, lessening the blow,” Gross says, adding that a slowing Chinese economy may disrupt trade and raw material demand, “but it does not necessarily result in asset price declines.”

For investors, these shifts underscore the need for strategic asset allocation.

“US market valuations are high relative to other global markets, and benchmarks are highly concentrated in technology and US assets,” Gross says. “Active management is the most direct antidote, allowing managers to maintain exposure to high-quality assets while remaining mindful of valuation.”

Gross believes that a strategic tilt toward European, Japanese, or emerging-market assets may become necessary if US advantages fade.

He also highlights the risks to US economic leadership.

“A combination of factors reducing the relative strength of the US could lead investors to perceive the balance of risks elsewhere as more favorable. This could trigger a self-reinforcing cycle of capital outflows, dollar weakness, and higher cost of capital,” he says.

Still, the dollar remains firmly entrenched.

“There is no viable alternative to the dollar at this point that offers the scale, liquidity, and transparency of the US currency,” Gross says. “The use of the dollar in global trade and financial activity is secure for the time being.”

There are further insights from the SIAG group’s paper on the JPMorgan website.