Qi Macro Spotlight: US Exceptionalism at Risk

Summary:

In this note, we ask if US exceptionalism is at risk and explore the scope for RoW outperformance.Applying Qi’s macro factor equity risk model (MFERM), we highlight that the YTD attributablemacro factor returns of EEM and EFA have been higher than SPY. We reveal the macro drivers ofthat relative factor return outperformance.

First, a series facts to provide context:

• Foreigners own a historical record amount of US equities: ~30% of total equity market cap.
• FXI, the Chinese large cap ETF returned 29% in 2024, outperforming SPY for the first time in7yrs. China is investable despite what commentators say.
• Technically, the US bull market started in 2023 following the >20% correction in 2022.Incidentally, soon after the release of ChatGPT in Nov22. History may not repeat but the thirdyear of a bull market is associated with single digit returns.
• The S&P500 equity risk premium is at 20yr lows (proxied by the index earnings yield relative to10yr risk free).• The current Republican majority in Congress is one of the slimmest in history.
• Scott Bessent has an objective to boost US GDP growth to 3% while at the same time reducethe budget deficit from 6% to 3%. The Atlanta Fed GDP nowcast is already today at ~3%.
• The Eurozone and Japan composite PMIs are now >50.• DeepSeek, the Chinese developed LLM, has achieved competitive results with significantlyfewer resources than its global competitors. It has also taken a more open-source approach.

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Given the above, a series of observations and conjectures:

• US equities are priced for perfection, the RoW is not – The S&P500 has outperformed MSCIWorld ex US by >400% since the GFC.
• If we are in a single digit US equity return world, RoW has room to outperform. Consider thatwhen the US is up 20% no one cares about RoW. When the US is down 20%, you selleverything. So in a single digit return world, do we have room for RoW?
• Is Trump actually a catalyst for RoW to act more forcefully on fiscal policy? Will the Germanelections unlock the debt brake? China has substantial room to act fiscally. Japan is world’slargest holder of treasuries after China. There is risk of further repatriation to drive theirdomestic agenda.
• Is peace in Ukraine bearish Europe or actually bullish?
• Successful execution of Bessent’s 3 arrows is a tough ask given the slim majority and deficittarget.
• Are we at peak Trump vibes with the launch and subsequent sell off of Trump / Melania coin?
• DeepSeek’s innovation questions the return on the huge AI capex of the US Tech MegaCaps.It is willing to share its breakthroughs and therefore a potential disruptor to US AI.• US equities may well do fine in 2025 but if US exceptionalism is questioned RoW willoutperform…in the words of Wayne Gretsky, skate to where the puck is going.

So what to look for? To be right on the above, the dollar must weaken and commoditiesrally. What does Qi’s macro factor equity risk model show? The attributable factor return of EEM andEFA (ie. the return trajectory based purely on macro drivers) have been rising YTD relative to SPY.Why? The top driver is the 7% rally in copper YTD. The weaker dollar, stronger economic growthand higher WTI have also allowed for relative factor return strength. See the series ofcharts below.

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