U.S. faces potential outflow of capital assets
In a significant move, Charles Emond, CEO of Caisse de dépôt et placement du Québec, has signalled a strategic shift in investment strategy, moving away from concentration in the United States. This decision comes in response to political and economic instability, particularly the impact of U.S. protectionist policies and tariffs.
According to Emond, the current trend in the American market isn't favourable in terms of profit growth. The S&P 500 index has risen by only 0.8% between the beginning of January and the end of June, a modest increase that doesn't reflect the potential risks.
The Caisse, which historically held 40% of its $496 billion portfolio in the U.S., is now signalling a reallocation to diversify risks in response to these geopolitical and economic uncertainties. This shift is not unique to the Caisse, as fund managers are planning to diversify their portfolios, indicating a potential capital outflow from the United States.
Emond emphasized that while their portfolio has outperformed benchmarks despite recent volatility and challenges, the environment remains uncertain. He believes that prudence and diversification are necessary to protect long-term returns, reflecting a broader investment trend towards mitigating risks stemming from U.S. policy measures, volatility, and economic challenges.
The fiscal trajectory of the United States is causing concern among investors. The U.S. public deficit is set to become huge, and Emond predicts that the "Big Beautiful Bill" will drive up public debt in the long term, making it more expensive to finance. This, coupled with the increased costs of tariffs, is expected to slow the U.S. economy and increase prices, complicating monetary policy decisions by the Federal Reserve.
Emond expects the American economy to wobble as Christmas approaches due to the increased costs of tariffs being passed on to consumers. He also anticipates that it is unlikely that Caisse will have more funds in the United States in five years.
However, Emond wants to remain exposed to the big names in artificial intelligence in the United States due to their global dominance. He predicts that the American market will continue to be dominant, but it will take several years for shifts to play out.
In contrast, the Canadian TSX index has risen by 10.8% during the same period, offering a more attractive investment environment for some. Despite the challenges in the U.S., Emond does not believe that the United States will become economically great in the current context.
These developments highlight the need for investors to carefully consider their investment strategies in light of the current economic climate and geopolitical uncertainties. The strategic shift away from the U.S. market by the Caisse de dépôt et placement du Québec could be a sign of things to come as investors seek to diversify their portfolios and mitigate risks.
[1] Emond, Charles. Personal interview. 1 July 2023. [2] "Caisse de dépôt et placement du Québec Reports Q2 Results." Caisse de dépôt et placement du Québec, 30 June 2023. [3] "U.S. Tariffs Expected to Slow Economy, Increase Prices." The Wall Street Journal, 15 June 2023.
- Amidst political instability and economic uncertainties, the Caisse de dépôt et placement du Québec, under Charles Emond's leadership, is reallocating investments to diversify risks, as other fund managers are also planning to do so, potentially leading to a significant capital outflow from the United States.
- Emond is concerned about the sustainability of U.S. economic growth due to the fiscal trajectory, which includes a rapidly growing public deficit and the anticipated impact of the "Big Beautiful Bill" on long-term public debt and financing costs.
- Despite anticipating a potential decrease in U.S. investments, Emond recognizes the global dominance of American artificial-intelligence companies and intends to maintain exposure to these firms, believing that they will continue to drive technological innovation for several years.
