Westbourne's Whelan on 2026 Market Outlook and Global Stimulus

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00:00Shamila, there's not much to write home about when it comes to the markets today,

00:02but we have seen a bit of consolidation, if that's the way to frame it.

00:05Certainly some upside for U.S. stocks.

00:07A lot of that, it seems, coming down to expectations around a more dovish Fed,

00:10expectations of a cut in December.

00:12What is the next catalyst for these markets?

00:15What's the next catalyst?

00:16Is it the Fed? Is it something else?

00:18I think it's going to be the Fed and some stabilisation in the labour market.

00:23What gives you the idea, what makes you convinced, if you are convinced,

00:27of what is suggesting that you're going to see stabilisation in a labour market

00:31where we have seen some fractures stateside?

00:34No, we've certainly seen some fractures, but let's put the labour market...

00:36There's no doubt that the labour market has softened, right?

00:39But let's put it in perspective.

00:42Unemployment is at about 4.4% compared to 4% at the start of the year,

00:46but the pre-pandemic average is about 5.1%.

00:49So the labour market has softened, but it isn't collapsing.

00:52The real problem is the cost of living, right?

00:54If you look at household disposable income,

01:01it's in 2024, in 65% of states, it was below the national average.

01:07And since 2019, household real spending has outpaced real income.

01:13So it's going to be about what Trump does going forward.

01:16And I think now he will be very much focused on delivering the domestic MAGA agenda,

01:23which will help the housing market.

01:27Sorry, not the housing market, the labour market and the consumption story.

01:31And that happens in 2026?

01:32And the lead-up in the midterms is a guiding point for the Trump administration on that?

01:36I think so, absolutely.

01:38He has to be totally focused, looking at his approval.

01:40So as an investor, how do you position around that?

01:42Oh, you know, so that is the, you know, all the fluff around it.

01:47For me, as you know, Tom, it's my business cycle framework to investing.

01:51And I look at the five indicators.

01:53And they are, like this year, were signalling, you know, no recession, no inflationary spike.

01:59And next year, I'm looking for actually growth to pick up.

02:02And the most important leading indicator, which is the profit cycle,

02:06has strengthened through the first three quarters of this year in the U.S., Japan, Taiwan.

02:14Investment cycle is an upswing in the U.S., Japan, Europe.

02:19So where are we in that investment cycle?

02:21We're still, we, the U.S. is still quite some time away from entering the boom stage.

02:26And I say that because although the corporate profit cycle and the investment cycle is in upswing,

02:31the credit cycle is still in downswing.

02:34And actually, real lending rates are tight for where the economy is in the business cycle.

02:42Do you have a level of concern?

02:43What's your level of concern around credit risks in the U.S. right now?

02:46We have seen some high-profile blowouts in the auto sector, some vulnerability,

02:50some cautionary words from the likes of Jamie Dimon, of course.

02:52Is that a potential black swan for 2026?

02:54I'm not seeing it right now because if you, you know, of course there's blowouts,

03:01but the question is, does it pose a systemic risk and is it a big problem in the corporate sector?

03:07I don't see it.

03:08If you look at U.S., corporate balance sheets are really, really strong.

03:11Corporate debt as a share of GDP, corporate debt has been trending down for years now.

03:17If anything, they're under leveraged.

03:18We just spoke briefly about, you know, the tech companies and the, you know, round dealing.

03:27And that is a concern.

03:28But there, with Barr, Oracle, they are meeting that out of balance sheet, right, rather than borrowing.

03:36Very different from dot-com, right?

03:38So the rally continues.

03:40We have further upside for U.S. stocks next year.

03:42Do you have a target in mind for the S&P 500 that you can point to?

03:47And if that is your view, what derails that rally?

03:50What's the biggest risk at this point?

03:52Okay, so I don't have a target.

03:53But what I am looking is for a broadening of the rally because at the moment, as we know, very much tech.

04:00Is that at the expense of MAG7?

04:01As in investors rotate out of the hyperscalers and into...

04:06I think, you know, with MAG7, it's poised for a correction.

04:11We saw last week the markets take a hit.

04:14MAG7 is still poised for a correction.

04:16Yeah, any correction would be a healthy correction.

04:18But the underlying trend, it's, you know, it's the AI wave.

04:22So, you know, it's a healthy correction to buy.

04:25But I just see the rally broadening into industrials and consumption discretionaries as well.

04:31Because also, remember, thanks to Trump's big, beautiful, one big, beautiful folly, as I like to say, call it,

04:39there's 3.1 trillion being transferred to households in federal tax cuts and transfers between 2026 and...

04:52Do you think investors are underestimating the fiscal impulse that we're going to be getting,

04:57not just from the U.S., but Japan, possibly China, and Europe as well next year?

05:04I don't think they're really talking about it.

05:06Right. And when everyone talks about fiscal impulse, they talk about China.

05:11But actually, if you look at it, China's spending the least, right?

05:15The big fiscal impulse is from the U.S., which we know well, but also Europe, right?

05:22And when you put the numbers in perspective in Europe,

05:25they're pretty close to the U.S. in terms of Biden's now defunct Inflation Reduction Act

05:31and the Science and Chips Act.

05:33And then there's the $800 billion rearm Europe plan.

05:37There's a lot of fiscal stimulus coming here through both.

05:41And then we've got Tokaichi with $134 billion.

05:44The new Japanese prime minister.

05:46How do you play the European stimulus story then, the defence story, the infrastructure story?

05:51What is the best play around that from a stock's perspective?

05:55From the start of this year, I've been overweight European defence as well as U.S. defence,

06:00and I would stick with those.

06:03I would be overweight European industrials.

06:08I think the consumer story will lag the U.S., while in the U.S. I would be broadening across sectors.

06:15Would a peace deal between Ukraine and Russia lead you to sell those defence stocks in Europe?

06:21No, absolutely not, because...

06:24Because we've seen them taking a knock this week.

06:28Any headlines around progress in talks between Ukraine and Russia,

06:32and big tech names like Ryan Mattel have taken a knock?

06:34I would say that is an opportunity to buy, because...

06:38And not only just European, U.S. defence stocks, because as much as Europe is going,

06:42OK, it's all for European companies, the reality is, the European defence sector is,

06:51besides one or two big names, is very, very fragmented.

06:54They can't produce at scale.

06:57And more than that, for the software technology, including navigational and missile defence,

07:02they're totally dependent on U.S. for technology.

07:07So I would say, you know, I'm overweight both U.S. defence as well as European defence,

07:12and especially given the NATO commitments.

07:15So Ukraine, you get a peace deal, but the pressure is on Europe,

07:21and especially if we get the kind of deal that is being discussed,

07:24there's even more pressure on Europe,

07:27because Trump just wants a deal and wants to start focusing on the domestic agenda.

07:32What sectors or what names are you steering clear of right now?

07:36You know me, Tom. I'm not a stock picker.

07:41No, but, OK, sectors or regions that are looking less attractive or overvalued.

07:46What am I steering clear of?

07:48For sure, China consumer discretionary, China property, Japan as well.

07:58I prefer industrials and even export cyclicals to consumer discretionary,

08:03even despite the recent, this week's fiscal stimulus package.

08:08The shine has come off India a bit for me.

08:14Have we felt the full impact of tariffs now?

08:16Is that a story that's behind us?

08:18The industrials, you talk about industrials, have they absorbed and adjusted around tariffs?

08:22The tariff story war is over.

08:25The war was over in May, and I think I was in earlier, at the beginning of the year,

08:30where I said, like, by the second half of the year, the tariff war would be over.

08:34All major trading partners would have either renegotiated trade deals with the U.S.

08:38or would be at the negotiation table.

08:41And that's what has come to par.

08:43And I think the thing to mention about the tariff war is how modest the impact has been, right?

08:50If you look at global exports, in particular Asian exports, they've continued to rise through the tariff war.

08:58You look at what's happened to global exports, they fell by about 7% between December and February.

09:04And since then, they rebounded 17%.

09:06And you compare it with GFC, it fell 47%, peak to trough.

09:14Compare it with the pandemic lockdown, 33%.

09:17Latest data shows Asian exports are up 15% year on year in October.

09:23Okay.

09:23Relative resilience in the face of that trade tension.

09:26Shamila.

09:26They've absorbed it.

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