The US has long enjoyed an equity premium: US assets generating higher multiples of earnings than in other places. Besides strong economic fundamentals (e.g. demographics, growth rates), the power of the U.S. dollar as the global reserve currency and corresponding American “exorbitant privilege”, the preponderance of the American military that can protect American assets in times of crisis, as well as a strong domestic tech sector that has driven growth in recent years, international investors tend to assume – often implicit –that US governments are pro-friendly. In contrast, investors often price in “political risk” in other countries, where government have strong influence in industry and business and political cycles significantly impact business cycles.
What does this mean?
The belief that American government would not (and often cannot) get in the way of the economy stems from the liberal American culture, with its high esteem of private enterprise, importance of individual liberties and general wariness of government intervention and Big Government. However, this “business first” policy and emphasis on economic interests has now put the US in a severe corona health recession, with infection and deadly victims per capita much higher than in other crisis. As a result, financial markets followed suit, with US equity markets taking big hits (especially compared to Asian stock markets).
We have written before that there is an increasing need for complexity thinking and systemic responses to global uncertainties. As a result, the laissez-faire model of the U.S. might not fit the current complex economic reality, where globalization, digitization, financialization and other abstract forces create much more uncertainty and create new “wicked problems”. In contrast, countries with strong governments, that have both the scope and capacity to intervene and formulate coherent policy responses in times of systemic risk (e.g pandemics, war, climate change), could enjoy a new “complexity premium” from international investors. As such, the new safe haven could become East-Asian stock capital and debt markets, where governments generally have a stronger hold in the economy and operate from long-term industrial policies. As such, the current coronacrisis could be a huge accelerator of Asia’s financial catch-up.