Bad news is good news: Lazard's Ron Temple on global markets and where investors need to be cautious

"What worries me is investors have almost gotten into this mode of 'good news is good news and bad news is good news'," said Temple. 

'[The] labour market's weak. Well, that means the Fed's going to bail this out. Tariffs still haven't shown up - people are just assuming, 'well, the data's not bad. It's not going to be so bad.' And so I think the higher the valuations go, the more optimistic people get about these markets, the more worried I get that there's room for an air pocket underneath."

"There is a systematic attack on Fed independence in my view from the White House," says Temple. 

"I've been very out-of-consensus here to-date in terms of believing that the Fed would not cut rates before year end," says Temple. 

It's enough for him to ring the warning bell on sustained US outperformance. 

"My bias is to say this is the beginning of the end of American exceptionalism, driven in part by convergence in GDP growth rates, divergence in inflation as US inflation goes up and global inflation ex-US goes down."

"The positive side is the US is on the lead on AI and AI is revolutionising the global economy. And I do think the US will realise more productivity benefits earlier from AI than any other economy."

But that benefit may only extend to the obvious big names, not the wider US market.

The view on global markets

"My favourite anecdote is since the end of 2007, Chinese GDP is up 400% and the equity market is down."

On Japan, he's a lot more positive after long-awaited changes to corporate governance codes.

"After 30 years of no inflation and developing a fortress or a siege mentality, companies just kept accumulating cash they couldn't deploy," says Temple. "So giving that cash back to shareholders lowers your equity value, but it raises your return on equity. And I think what's important there is from an economic perspective, you get the money to people who can deploy it somewhere useful."

"I never thought I would use the words corporate governance and exciting in the same paragraph, much less the same sentence."

"From 1999 to 2021, consumer prices in Japan went up 1% in total in 22 years. Since the end of 2021, prices are up 12%," said Temple. 

"Consumer psychology is changing, wage demands are changing. Japan is becoming a more dynamic economy. Make no mistake, it's Japan. It takes time. But I think for investors with a long-term horizon, this is somewhere where they should have capital invested."

"Typically government spending more money or borrowing more money does not get me energised. What I think is different here though is if you look at one of the biggest differences between the US and Europe for decades, it's been the size of the tech sector and the success of technology and the innovation in the US," said Temple. 

"There are cultural differences that still need to be resolved in Europe in terms of qualitative things like in the United States, it's almost a badge of honour to have started four companies that failed. But if you get the fifth one right, you're a hero. That's not the case in Europe."

If this changes, Europe could see a huge multiplier effect over the next few decades. 

"I think from a protection of capital perspective, reallocating on the margins to other markets outside the US makes sense. And frankly, reducing US dollar denominated exposure on the margin also makes sense."

"So it's not some kind of keep you awake at night apocalyptic scenario. It's one that's reasonably predictable and foreseeable. I just think markets are underestimating what might happen and how important it might be."