According to DBS Chief Investment Officer Hou Wey Fook, the US economy is entering a “new era” where fiscal policy will play a much larger role. This is driven by President Donald Trump’s expansionist policies, which are expected to lead to increased government spending. As a result, the US economy is likely to experience a significant shift, with fiscal dominance looming large. This new era is characterized by rising deficits and spiraling debt, which raises concerns about the erosion of Federal Reserve independence and the potential for inflation.
Hou warns that investors need to be prepared for this new era, as it poses significant challenges for portfolio management. To mitigate these risks, Hou recommends a four-pronged asset allocation strategy. Firstly, investors should ride the artificial intelligence (AI) wave by investing in companies that leverage AI for efficiency. Secondly, they should manage sticky inflation by investing in real assets such as infrastructure, real estate, commodities, and precious metals, which have historically outperformed during inflationary cycles.
Thirdly, investors should seek value in Asia ex-Japan equities, which are currently trading at a significant discount compared to developed markets. Finally, they should focus on quality in equities and credit, as high-beta assets are likely to outperform in this environment. Hou notes that these are extraordinary times, with macro conditions improving but valuations remaining steep across asset classes. With central banks increasing liquidity, inflation is likely to trend higher, making it unviable to stay in cash.
Overall, Hou’s report suggests that investors need to be proactive in navigating the new era of the US economy. By adopting a strategic asset allocation approach, investors can protect their portfolio value and capitalize on the opportunities presented by this new era. The key is to be prepared for a more inflationary environment and to invest in assets that are likely to perform well in such conditions. By doing so, investors can mitigate the risks associated with the rising deficits and debt, and position themselves for success in the years to come.