Innovation, earnings growth and ruthless capitalism will continue to drive US equities’ relative outperformance

Higher-for-longer inflation and interest rates have been our view for the longest time. We have written on this subject numerous times, warning that inflation will remain at levels that are higher than they were in the last decade. The era of increasing globalisation that drove the secular deflation in the prices of goods has ended. The reverse is now happening. Deglobalisation is being driven by the rise in populism and protectionism — for instance, the backlash against immigration we believe is irreversible — US-China tech war and decoupling, geopolitics, disruption to supply chains, reshoring and near-shoring — all of which will increase production costs and prices, at least in the short to medium term. Interest rate, meanwhile, is the price of money that is determined by market demand and supply. Higher inflation tends to translate to higher interest rates, as will the massive debts (that need to be serviced and refinanced) racked up by the government during the pandemic. We will not go into all the details here but we have selected three articles written in the past year alone that you can re-read in our archive (see Flashback).