Policy and tech to fuel next growth cycle

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Eric Morin, global head of research at CIBC Asset Management 

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The cyclical and the policy tailwinds that are the most responsible for keeping global growth near trend are, first, monetary policy. There’s a lot of central banks that have cut in 2025, and that should support global growth with a lag in 2026. So monetary policy is acting with a lag, and what we saw in terms of cuts should provide tailwinds in 2026. And also the level of policy rate is, in general, stimulative or neutral in growth. So, this is another factor reinforcing the argument that monetary policy is a growth tailwind. 

The second aspect that should support growth is fiscal policy. Fiscal policy in the current regime also includes military spending. There is a changing world order that is taking place, and as a result, we see in a lot of countries strong and inelastic demand for military investment. That is the case in Germany, and Europe, and Japan, and China. Also in the U.S., and also in Canada. And military spending is a key growth tailwind that we have not seen for decades. 

And there is also fiscal policy in general. That is another tailwind. We have pro-growth fiscal policy, again, in the same countries and more. So we have Japan, Europe, Germany, China, the U.S. and Canada. So really, policy is really pro-cyclical right now. 

And last, but not least, the other big bucket is the global tech cycle. Historically, the global tech cycle has been a coincident or a leading indicator of the global business cycle, and we do think that this global tech cycle has legs and will continue to be a key growth driver for the global economy. 

What we have different this time is it’s not only a final demand global tech cycle, but it’s also an investment-led global tech cycle. We have AI investment. We have global data centres. We have the natural resources needed to produce the tech equipment and the buildings. This is coming from, let’s say, emerging markets. We have memory chips that are produced in Korea. We have chips that are produced in Taiwan. And so there is a lot of investment that is taking place globally. And we think that this thematic has legs, and it should continue to provide support to growth in 2026. 

One of the factors that magnifies the global tech cycle is, of course, AI, which is a new thematic that is underway. But we also have military spending because the marginal increase in military spending is increasingly towards tech and AI, and so there is an overlap, conceptually, between military spending and AI. 

So, all of this to say that we have three key buckets — monetary policy, fiscal policy and global tech — that are supportive of growth. So yes, we have tariffs in the U.S. Yes, we have immigration policies that are a growth impediment in the U.S. But when we take into account the tailwinds, we have a global growth outlook that has narrow potential. 

And why we care about that at the end of the day as investors, it’s because that growth outlook is compatible with an environment supportive of risk assets first. And because of the investment tailwinds, this cycle phase is also compatible with elevated or higher productivity, which has historically been a tailwind for risky assets. 

So, the global backdrop is overall positive for risky assets, and is also supportive of a weaker U.S. dollar. The U.S. dollar tends to depreciate when global growth is healthy, and global growth is indeed healthy in terms of the outlook. But in terms of the composition of growth, we see slightly stronger growth outside the U.S., and some growth slowdown in the U.S. towards potential. And that dynamic is compatible with a weaker U.S. dollar. 

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The biggest reason why we have a conviction that the U.S. dollar should depreciate is the fact that growth outside the U.S. is improving, while in the U.S., growth is normalizing. Growth should slow to potential, while in the rest of the world, growth should be improving. So that growth differential story should be a headwind for the U.S. dollar, and that should provide impetus to cyclical currencies. We have this cyclical story that is the first argument that justifies the underweight U.S. outlook. 

The second argument is more structural in nature, and it’s related to the fact that the U.S. has a large current account deficit with the rest of the world. And what it means is that the U.S., for example, imports a lot from the rest of the world, much more than it exports, and that deficit has to be financed by inflows of investment by foreigners. And historically, this has not been a problem because U.S. stocks are exceptional, and there’s been a strong appetite historically. And what I’m saying there is that that headwind of current account deficit on the currency has been historically offset by strong inflows of capital. 

But the problem is that the deficit is getting bigger, and it’s a structural story. And if we were to see less appetite for U.S. assets, that would result automatically in a weaker U.S. dollar. If, let’s say, the U.S. were to become less exceptional in terms of its attractiveness for bonds or U.S. Treasuries, that shift in foreign demand would trigger depreciation automatically, given the large deficit that the U.S. has. 

The other aspect that is structural is the fiscal deficit, and the fiscal situation in the U.S. Deficits are really elevated. In the U.S., fiscal policy is pro-growth, and the fiscal situation in the U.S. is, for certain investors outside the U.S., is a concern. There’s a lot of institutional investors that have a long-term focus in emerging markets that are having less appetite for U.S. Treasuries. Those investors, they want to reduce an excessive reliance on U.S. Treasuries in their holdings, for example. 

And so that rebalancing, if you will, is something that is compatible with weaker inflows of investment in the U.S. for U.S. Treasuries. And that fiscal story is indirectly contributing to U.S. dollar weakness via the foreign demand channel. 

The other aspect is valuation. The U.S. dollar is overvalued. What’s important to keep in mind with the U.S. dollar cycle is that it’s a mega cycle. We have the business cycle that may last a few years. For the U.S. dollar, the cycle could last up to a decade, if not more. The U.S. dollar has remained overvalued for quite a lot of time, and so the direction of travel is naturally towards a weaker dollar. 

And last, but not least, there is a changing world order, if you will, where the world order is becoming less U.S. centric. It’s a world that is going to become more multipolar, more fragmented, and this is taking place in a context where the U.S. is having more political woes. The U.S. is becoming more dysfunctional as a democracy. And this is something that is reducing the appetite for foreign investors, at least for U.S. Treasuries. That political and geopolitical bucket is something that should reduce the attractiveness of the U.S. dollar as a global reserve currency. 

That said, it’s important to reiterate that the U.S. is and should remain the provider of the only global reserve currency because of the breadth and the debt of capital markets in the U.S. But we see room for less demand for the U.S. dollar. 

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We do think that gold has room to move up further because the world is changing. We have the geopolitics. We have the U.S. politics as well. And if we look at the ratio of gold in central banks’ reserve globally, what we see is that their current ratio is quite low by historical standards. It’s slightly above 20%. Before the fall of the Berlin Wall, that ratio a few decades ago, that ratio was above 30%. And during the Golden Age of the U.S.S.R., this ratio of gold in reserve was above 50%. 

So we do think that that ratio has room to go up over the next few years, and that will be driven by strong inelastic demand by central banks. 

We do love exposure to equity markets that are exposed to the gold story. Canada is a gold producer, and what we saw this year is that the strain on Canadian stocks has coincided with upside pressure on gold prices. So if we believe that gold prices should continue to go up, that should provide further tailwind to Canadian stocks. 

We do believe that Canadian stocks are also attractive for other reasons. First, on a relative basis, their valuation is attractive compared to U.S. stocks. So we have a relative valuation story. The Canadian market also offers diversification away from the tech-heavy U.S. index. We have also the fact that the large sector weight in financials in Canada should benefit from a positively sloped yield curve. So that is another factor as well.

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