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In today’s newsletter:
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Trump, tariffs and ‘peak pessimism’ over Europe at the WEF
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US stocks at most expensive relative to bonds since dotcom era
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Bridgewater founder Ray Dalio warns of UK ‘debt death spiral’
Trump’s return drowns out the Davos agenda
Fomo is pervasive at Davos — there’s always a more exclusive party or powwow, as I found out last week when I attended the World Economic Forum for the first time.
But as the so-called global elite descended on the Swiss mountain resort on Monday, the overwhelming feeling was that the real action was far away in Washington.
Goldman Sachs boss David Solomon, Uber chief executive Dara Khosrowshahi and investment banker Ken Moelis were among those who attended events in the US capital to mark the inauguration of Donald Trump and then hotfooted it to Switzerland.
This year’s theme at Davos was nominally “Collaboration for the Intelligent Age”. But the talk of the town was Trump, tariffs and what one senior US banker called “peak pessimism” on Europe.
“Dominating the agenda at Davos this year is Trump 2.0 and what . . . Europe needs to do in order to ensure that it is competitive and frankly secure,” Kasim Kutay, chief executive of Novo Holdings, the $187bn investment arm of Danish drugmaker Novo Nordisk’s philanthropic foundation, told me. European Central Bank president Christine Lagarde declared that the continent was facing an “existential crisis”, while one top bank executive put it even more bluntly, saying “it’s five minutes to midnight for Europe”.
Hours after Trump unveiled a blitz of executive orders, the same banker proclaimed that “everyone is all-in on America”. Summing up the prevailing mood, he said the next four years would be characterised by a “bonfire of regulations, ‘drill baby drill’, and the end of [environmental, social and governance] standards”.
The main tenets of the Davos agenda — diversity, equity and inclusion, free trade and climate change — were drowned out by US exceptionalism, artificial intelligence and a cryptocurrency frenzy, even as wildfires raged in California and daytime temperatures in the ski resort rarely fell below zero.
UK chancellor Rachel Reeves was among those who came to Davos on a charm offensive, to reset her relations with big investors and declare that Britain was open for business. The verdict? “Rachel Reeves is thinking the right way but she’s in a difficult position,” said one senior UK bank executive, pointing to the country’s lack of economic growth.
While the tech and crypto communities were in an elated mood, Trump fatigue was already setting in among some of the Europeans I spoke to, and investors articulated a wave of concerns.
Those with exposure to private equity lamented the lack of exits; and bosses of both traditional and alternative asset managers jostled to position for the wave of consolidation that is already reshaping their industries.
“People are worried about everything related to ESG, diversity and disclosure,” said Ronald Wuijster, chief executive of APG Asset Management in the Netherlands, one of the world’s largest pension funds.
Katie Koch, chief executive of asset manager TCW, said: “We need to balance the extreme optimism about America with current valuations,” noting that the S&P 500 index is at new highs and corporate credit spreads are already tight.
Nicolai Tangen, head of Norway’s $1.8tn oil fund, warned of high sovereign debt levels and the “real threat” that inflation expectations would be revised upwards, a view shared by hedge fund manager Ray Dalio, who repeatedly told investors behind closed doors that they were too complacent on rates. “If interest rates and inflation go up, people will get super spooked,” agreed Jo Taylor, chief executive of Ontario Teachers’ Pension Plan.
And as attendees questioned whether — and where — the animal spirits might backfire, there was a gnawing feeling that historically, the event most likely to happen is the opposite of whatever is the Davos consensus.
The head of a big private equity firm said simply that “so much optimism makes me nervous”, while a senior banker said many of those in attendance this year had “come to the realisation that the outside world looks at this crowd and doesn’t drink the Kool-Aid any more”.
Read our full dispatch from the mountains here
Chart of the week
US equities have soared to their most expensive level relative to government bonds in a generation, write Ian Smith in London and George Steer in New York, amid growing nervousness among some investors over high valuations of megacap technology companies and other Wall Street stocks.
A record-breaking run for US equities, which hit a fresh high on Wednesday, has pushed the so-called forward earnings yield — expected profits as a percentage of stock prices — on the S&P 500 index down to 3.9 per cent, according to Bloomberg data. A sell-off in Treasuries has driven 10-year bond yields up to 4.65 per cent.
That means the difference between the two, a measure of the so-called equity risk premium, or the extra compensation to an investor for the risk of owning stocks, has fallen into negative territory and reached a level last seen in 2002 during the dotcom boom and bust.
“Investors are effectively saying ‘I want to own these dominant tech companies and I am prepared to do it without much of a risk premium,’” said Ben Inker, co-head of asset allocation at asset manager GMO. “I think that is a crazy attitude.”
Analysts said the US’s steep equity valuations, labelled the “mother of all bubbles”, were the result of fund managers clamouring for exposure to the country’s buoyant economic and corporate profits growth, as well as a belief among many investors that they cannot risk leaving the so-called Magnificent Seven tech stocks out of their portfolios.
“The questions we are getting from clients are, on the one hand, concerns about market concentration and how top heavy the market has become,” Inker said. “But, on the other side, people are asking ‘shouldn’t we just own these just dominant companies because they are going to take over the world?’”
Five unmissable stories this week
Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading for a “debt death spiral”, in which it has to borrow more and more money to service its rising interest costs.
France’s BPCE combined its investment arm Natixis with Italian insurer Generali because it could not be a “global champion”, the bank’s chief executive Nicolas Namias said, as he announced the latest consolidation in the European asset management sector.
The Federal Reserve is poised to keep interest rates on hold “for the foreseeable future” and could even boost borrowing costs, as central bankers await clarity on Donald Trump’s policies, said Dan Ivascyn, chief investment officer of bond fund giant Pimco.
Jason Windsor, the chief executive of Abrdn, has defended the asset manager’s rebranding and said he has no plans to change its name, as the group reported a return to customer inflows last quarter after a difficult few years.
Boaz Weinstein’s Saba Capital has agreed to halt its activist battle against 50 BlackRock funds in exchange for a tender offer at two of them, as the hedge fund wages a broader war against the closed-end fund industry.
And finally
In keeping with this week’s Swiss theme, I wanted to highlight a major exhibition of the work of Swiss-French artist-architect, designer and urban planner Charles-Édouard Jeanneret, which is opening next month at the Zentrum Paul Klee in Bern. Jeanneret lived by the pseudonym of Le Corbusier. His immaculate Paris studio and apartment — an early example of his 1927 modernist manifesto Five Points of Architecture — is also well worth a visit. “Space and light and order,” said Le Corbusier. “Those are the things that men need just as much as they need bread or a place to sleep.”
Read the full article here