Talking Heads – Which long-term themes are set to drive global equity markets?

Talking Heads podcast recording with Nadia Grant

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing global equities. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Nadia Grant, Head of Global Equities. Welcome Nadia, and thanks for joining me.

Nadia Grant: Great to be here.

DM: Speaking to clients at the end of the year, pretty much everyone did seem to be overweight US equities and looking for a continuation. Needless to say, 2025 has not quite worked out. We have questions about how exceptional the US is. We think about the performance of the Mag-7 last year and that’s changed quite a bit this year. I’ve even heard some comments referring to the Lag-7. What’s your take on all of this?

NG: Since the Great Financial Crisis, the US have really been the biggest engine for global growth. Even when we think about the post COVID time, we’ve had that wave of innovation, and the market came to the realisation what AI could do in terms of productivity enhancement for the next decades. That’s what has propelled a few companies that morphed into the Magnificent-7 as they were the only companies that drove earnings growth and thus price appreciation. In the immediate aftermath of the [November 2024] election, there was hope that deregulation and tax cuts would unleash animal spirits. That marked the peak of US exceptionalism.

Year to date, the market has been driven by China and Europe. US exceptionalism is being questioned. The dollar index is down some 8%. The Magnificent-7 are now lagging. And that’s been driven by the realisation after DeepSeek that China is not too far away in terms of the race for AI. US exceptionalism is entering a self-inflicted slowdown and potentially stagflation as you have average tariffs that have gone from 2.5% pre-Liberation Day to over 20%. They will probably settle around 13% on average. So really denting that outlook for US growth.

This has coincided with a time where you’ve had a massive awakening in Europe in the form of the German infrastructure plan and the ReArm Europe defence programme. This is a catalyst and is going to change the outlook for Europe for the next decade.

But the US economy still represents a quarter of the world economy. 70% of the world market are in US companies. And those companies have a much higher margin, a much higher return on equity, they’re the best quality company in the world. So, the exceptionalism is not gone. We would note as well that some of the most contentious measures from the administration have been rolled back, such that we’re less likely to have a recession.

DM: One of the other things we knew we were going to get after the results of the election was volatility from US legal challenges and the surprises that we get on the geopolitical front. What are some of the ways that you think about geopolitics in terms of your investments?

NG: There are powerful megatrends that are shaping – over the very long term – interest rates, asset prices and risk taking across the market. We identified the megatrends of innovation, demographics, environment and geopolitics. Within geopolitics, the world order has been shifting towards more of a multipolar world and that creates more uncertainties.

Within this geopolitics megatrend, we identify themes that are going to provide above-market growth: onshoring or reshoring, but also defence spending. ReArm Europe was a great catalyst. Europe has realised that sovereignty, autonomy is key. You’re seeing countries finally adhering to their commitment of spending at least 2% of their GDP on defence. But it’s also more broadly. You see the same dynamics happening in Japan where they’ve raised defence spending as well in South Korea [and] Australia. So, we find great opportunities in that sector.

Within the onshoring theme, the infrastructure plan in Germany has provided great opportunities for us. The plan is going to provide a boost to European growth for the next decade or so. The sector that is most likely to benefit is, unsurprisingly, the construction sector. We’ve sourced great opportunities in SMID companies exposed to the German construction spending.

Europe has already outperformed the US by a wide margin: so far year to date about 20%. But we remain convinced that we should stay overweight the region because European company earnings are going to be well underpinned by GDP growth that is going to be similar to that of the US. And they’re benefiting from that fiscal and monetary easing as well as trading on multiples that are far more favourable.

DM: We talk about how markets perform differently than we expect, which would bring us back to one of those fundamentals of investing, diversification. How do you think about that when you go about investing today?

NG: It’s very important to source opportunities across geographies, sectors, themes, across styles. At the time when we had a selloff in the AI names that we like and that we still have conviction upon, it was really important for us to have exposure to those defence names in Europe. They were properly uncorrelated. As we believe the market is going to continue to be volatile, it’s important to have a wide fishing pond to source ideas.

DM: That’s a very good message for our listeners. If I could summarise some of the other key messages you shared with us, you talked about how US exceptionalism had driven the outperformance of US equities, but now that’s waning. We think about the impact of tariffs and this reorientation towards Europe, supported by, for example, the increased infrastructure spending in Germany. So, finding a lot of opportunities there. Well, Nadia, thank you very much for joining me.

NG: Pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities and global equities, please reach out to your BNP Paribas Asset Management contact or check out viewpoint, our website for investment insights at Viewpoint dot BNP Paribas AM.com. We recommend subscribing to Talking heads on your favourite podcast channel such as YouTube or Spotify. You’ll receive your podcast episodes every week. If you like Talking Heads, leave us a positive review and a nice rating. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Nadia Grant, Head of Global Equities. Please do join me next week. Until then, take care.