La Caisse's CEO Worried About US Stagflation
The head of Caisse de Dépôt et Placement du Québec said it’s time for the fund to scale back on US investments after years of growth and great returns.
“It’s been 10 years of US exceptionalism,” Chief Executive Officer Charles Emond said. “Obviously, you got to a point where we reached sort of a higher percentage than usual. We’re at 40% of our total fund in the US. I’d say that’s kind of the peak, like to trim a bit.”
The rest of the article is hidden behind a paywall and for some reason wasn't posted on BNN Bloomberg which is odd.
Anyway, I don't need to read it, I can tell you right away what Charles Emond discussed on Wednesday at Le Cercle Financier in Montreal and I wasn't there.
Charles Emond recently told the Financial Times La Caisse (they changed their name back to La Caisse from CDPQ) is set to invest more than £8bn in UK over next fives years and stated this on their US exposure:
The 52-year-old chief executive said the fund’s US exposure would probably be “trimmed a little bit” as it was “at a peak after a decade of outperformance”. But he added it remained the “deepest, biggest, closest market to us and we will continue to deploy money there”.
CDPQ’s plan to invest more in Britain comes as 17 of the UK’s largest defined contribution pension providers have pledged to invest at least 5 per cent of assets in their default funds in British private markets by the end of the decade, a move the government hopes will drive £25bn of investment into the UK.
Emond said this commitment from UK pension funds could create a “positive synergy” and help attract more overseas investment into the UK. He said CDPQ was keen to invest alongside British retirement funds as “like-minded partners” with local knowledge.
The fund currently has C$25bn in France — its second-largest market in Europe — which Emond also expects to increase by 50 per cent by the end of the decade.
He added he was investing “time and effort” in exploring opportunities in Germany, with the country’s energy needs and loosened fiscal rules ushering in “a new beginning there with plenty of opportunities”.
Basically, their US assets have done extremely well over the last decade and they're now trimming exposure (because they became a larger part of total portfolio) but remain highly committed to the "deepest, biggest, closest market".
Going forward, they're focusing their attention on the UK, France and Germany and they're not alone.
Why Europe? Because rates have come down there a lot (the ECB is more aggressive than the Fed) and there is a massive fiscal thrust going on in Germany.
Typically in alternative investments, you want to go long countries where rates are declining and fiscal policy is expansionary (not just Germany, France has room to spend more too, albeit a lot less room).
This in essence is why Blackstone likes Europe over the next decade and why La Caisse is investing close to US$10 billion in the UK over the next five years as well as in France and Germany.
There are great opportunities in Europe, it's as simple as that.
Is the US dead? Is US exceptionalism over?
Hell no! I don't buy any of this nonsense, the US remains the economic superpower of the world and nobody is in a position to displace it.
The S&P 500 is nearly back to record highs and even though there's a lot of complacency, the pain trade remains up.
Still, European, Canadian, Australian and Asian stock markets are all up as well and that shows you global investors are widening their geographic scope.
And even though the US dollar's crown is slipping fast over tariff concerns, I don't believe it will remain weak for a long period.
The only part of the Bloomberg article I would have liked to read is Charles Emond's thoughts on why stagflation is coming.
So far, tariffs have not shown up in the US inflation data, there are a lot of reasons why but it remains to be seen if the second half will remain as tame on on inflation.
If so, there will be mounting pressure on the Fed to cut rates aggressively.
Chales Emond alluded to mounting inflation pressures and it was reported in the French press:
The number of companies (in their portfolio) directly affected by the U.S. President's tariffs "is quite limited," Mr. Emond said.
"Of all the companies in which the Caisse has invested, globally, approximately 6% would be directly affected by tariffs, and 12% in Quebec. The reason is that, even if we forget, tariffs are on goods. Three-quarters of the economy is services," he argued.
Nevertheless, the macroeconomic impact "hits us 100% in the wallet, which affects everyone," with a potentially stagflationary shock, Mr. Emond said.
He said he was "impressed" by the counterbalances to the US administration, which are few in number but "quite effective," citing the courts and the bond market.
Still, Donald Trump is creating "a lot of uncertainty" at the moment. "We're still in a worse place than we were at Christmas, economically," Mr. Emond said, although the economy remains, for the moment, "somewhat solid."
According to him, the Trump administration "could be walking on thinner ice in the coming months," particularly if the economy weakens and inflation is felt in the United States, with the midterm elections in about a year's time as a backdrop.
"What we have to imagine is that there will be a kind of desire to declare a kind of victory in order to move on to other things, but it will remain bumpy. I think there is a logic that will prevail," Mr. Emond said.
I certainly hope logic prevails because so far, Trump 2.0 has been an abysmal failure on all fronts, including his immigration crackdown (going to be a long, hot summer in some big US cities).
Alright, let me wrap it up there.
Below, La Caisse celebrates its 60th anniversary, an important milestone in measuring how far it has come from its creation in 1965 to today. "On this occasion, we are affirming our convictions and identity by adopting La Caisse as our brand. This name pays tribute to the origins of our creation and proudly embodies our Québec roots."
Also, Blackstone is planning to invest as much as $500 billion in Europe over the next 10 years, Chief Executive Officer Steve Schwarzman said in an interview to mark the 25th anniversary of the money manager’s operations in London. “We see it as a major opportunity for us,” Schwarzman said in an interview with Bloomberg's Francine Lacqua on Tuesday. “They are starting to change their approach here, which we think will result in higher growth rates. So this has worked out amazingly well for us.”
In alternative investments, always follow the leader, Blackstone.
Lastly, Brad Gerstner, Altimeter Capital Founder & CEO, joins CNBC's "Halftime Report" to discuss his AI strategy.
Fascinating insights, listen to what Gerstner says and take all the talk of "the end of US exceptionalism" with a shaker of salt.
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