Welcome everyone. I'm delighted to host the conversation today with Ruchir Sharma, Chairman of Rockefeller International, a longtime colleague, adviser, and I'm happy to say, friend. He's a popular market commentator on TV and in print. He's the author of bestselling books, including his latest this past year, "What Went Wrong with Capitalism." He's recently published his latest piece in the Financial Times outlining the top 10 global trends in 2025. Ruchir, thanks for joining us today. Your report is fascinating, and we won't be able to cover every trend, but we're going to hit the major themes and the salient details underneath those. So I wanted to start, which I thought would be fun and fair, with something from your 2024 predictions that worked, and then something that, you know, didn't go where you expected it to go. So can we do that?
Yeah, sure, Greg. So when I look back at what I said in 2024, at the beginning, one of the big trends I highlighted was that this was going to be a big year for democracy, which is a fact that, in fact, we've never had so many elections in 200 years or something as we saw in 2024. So a massive political year. What I had said was that in most places the incumbent is likely to be in trouble, and that's because there's so much dissatisfaction amongst the average person, whether it's the average American, the average European, about how the system is working for them. So I said that the incumbent would likely be in trouble. And if you look at the statistic in terms of 2024, it's quite fascinating that the incumbent party lost vote share in every single developed country that went to the polls. So massive, you know, what we call anti-incumbency, and I think that that was also something which played a role in the US election. So that's the good part. Now, what didn't really work out is the fact that I thought that Europe would be more resilient than it was. We thought Europe would be more sort of like, would do better, but the core Europe, France and Germany, are in trouble. Germany's become UK.
If you lump it in there, it's not in Europe, but those three countries in particular.
That's right, and they're very large. Now, there is a flip side to this which I think gets glossed over, that all the European countries which were in crisis a decade ago, those are doing relatively well now. Greece, Spain, Portugal, the PIGS as they were called at that point in time, corrected pretty the course, corrected. I think that there's an important lesson here, even, you know, when that when countries go through a crisis, it's only then that they carry out big reforms. Problem with these very Germany, France type of countries is that they are large, they're not that dependent on foreign capital, so they think that they can sort of get away, and it's slow decline, and there's nothing which is there to force them to change. But these other relatively smaller European nations, they were forced to change, and so that's why that's the change we saw. But having said that, I think that there's no doubt that Europe did a lot worse in aggregate than I would have expected.
Okay, well, that's fair enough. And the elections are remarkable, but every single one, I didn't realize it was every single one. Obviously, it's a major trend. So let's fast forward now and come into 2025. And one of your overarching themes, and this kind of cuts across several of your trends, is contrarianism and the fact that something that has been working may have reached its peak and go the other way. Momentum strategies. So can you start by talking a little bit about, you know, that intellectual substance of tether to a whole bunch of things you're talking about?
Yeah, you know, historically, as we grew up, being contrarian used to be cool, which is that you came up with a contrarian view, you went out with that. It's very difficult to do because it's a very lonely place, but that was cool. What's been remarkable about this decade is how this decade has continued to reflect the same trends as that happened last decade. What do I mean by that? America has been outperforming significantly now since 2009.
By the way, when you run through this, you've looked historically at decades for a long time, and you talk about how typically from one decade to the next is a new driving theme. So this might be the first decade in a long time where you haven't had a new driving theme, right?
This half of the decade is looking very much like the entire previous decade did, which is incredible outperformance of American assets led by the big tech companies out here, the dollar remaining stronger, all the international markets doing very poorly compared to the US or most international markets. So these big trends that we saw last decade have continued to roll on this decade, and I think that we could be at a point now where it's become so stretched that we could get some snapback in this, and a pretty meaningful snapback. I mean, if you just look at the data here, America's outperformance versus the rest of the world has reached ginormous proportions. Now, the American stock market today is nearly 70% of the global MSCI benchmark, which everybody used, relative to 27% of world GDP. So, you know, this has become very stretched. The American markets' valuations in terms of its trading at 23 times, the rest of the world's valuations are close to record lows, like emerging markets. I grew up seeing this, and here in today, here's the most fascinating stat about emerging markets, that the valuation gap between the US and emerging markets today is the lowest it's been since the depth of the financial crisis in Asia and Russia in October of 1998.
And we're going to get into this, but this could be partly America more stretched. We're going to, you're, we're going to talk about the United States, but it also could be partly a lot of these other markets, particularly the ones performing well, like the ones you mentioned in Europe, being undervalued because, you know, people are just saying invest in the US and leave everything else out, right?
Yeah, there's a flood of capital which is coming into the US today. It's pushing up the dollar. By some measures today, the dollar is the most expensive it's been since it became a floating currency. When I travel the world today, the most expensive place to stay in a hotel or eat at a restaurant in the world is New York. You know, like a decade ago, I was saying the opposite, which is that a decade ago, America felt so cheap in terms of that you travel. What a great country. It's always been a great country, but you felt it. It also felt cheap, right? But today, it's become the most expensive on many metrics, not just the stock market, but the dollar and just travel and staying at hotels and eating at restaurants. This has become the most expensive. So I think there's a value case here finally. Now, contrarian investing doesn't always work because it's not as if trends turn around every year, and some people love to be that. No, it's not that, but I feel that the trends have become so stretched now that one of the big themes I have for 2025 is that the contrarian investor who has felt dead. I'm a big believer in America. I came here. I'm a huge fan of this country and stuff, but if you look at the long arc of history going back to the last century, whenever America's had a massive decade of outperformance, typically in the next decade that outperformance has given way to some underperformance. So in six of the last 11 decades, the American stock market has in fact underperformed the rest of the world. So it's not an article of faith that every decade America has to outperform, even if over the long arc of history, America is the best performing stock market in the world. So I think that this is something to keep in mind, that trends today are so stretched, valuations are so stretched, sentiment is so stretched, that in 2025, expect some snapback to happen. That's one of my big bold calls for 2025.
And again, one of the things that you're clear on is that you're still a believer in the American economy and the innovation here and artificial intelligence, but you're talking about valuation against history and the fact that it's really become very stretched. And we can transition to another topic that you talk a lot about, and I do, the budget deficit.
Yes, let's talk about the budget deficit, which I believe was on your list for 24, right?
Yeah, yeah, and now it's even bigger, so you're leaving it on the list for 25, right?
No, like in 2024, what I said was at the beginning of last year was that the bond vigilantes had been dead around the world and they were bound to come alive.
Right, and so if you look at around the world over the last year, all these countries now, the budget deficit concerns have come to the surface. The only country where it's not really sort of making an impact is here, is America. But the data has gotten considerably worse because America is running a budget deficit today of 6% of GDP. Historically, when you had full employment, the last 50 years, when America has run budget deficits anyway, the budget deficit has been close to 1% of GDP. So now you're at 6% of GDP, and if you have the tax cuts which are extended in 2025 without any major offsets through spending cuts, it'll be 7% of GDP. Now, this is really getting into uncharted territory, and one data that I have here which really sort of I think people should keep in mind, it now takes $2 of government debt to generate a dollar of GDP growth in America.
Wow. And what was that historically?
Okay, so in the 1970s, it used to be 30 cents.
Even a decade ago, it used to be less than a dollar. So it's a massive acceleration that's happening.
Going to happen to a financial crisis?
Yes, it was still less than a dollar.
Yes. So this is a bipartisan project, you can argue.
100%. But the whole issue is that it now takes $2 of government debt to generate a dollar of economic growth. So yeah, at the surface, economic growth can look fine, that we're still growing at two and a half, three percent, but how long can you sort of keep running such a budget deficit to get there? So now the incoming administration will try and do something on spending, I hope, but if they try and do something here, we should be prepared for at least some growth slowdown to take place because this has been an artificial impulse that's been driving the economy. So by the time the good stuff happens, let's say that they're successful on deregulation, they're successful in cutting some of the government fat, but in the short term at least, which could be a year, and I think that most administrations should think that way, which is that do what you can in the first year to clean the slate.
They clearly are looking to come in with some momentum.
Yeah, but in terms of do that, but my fear is the fact that people are not appreciating that if you try and claw some of this back, at least in the short term, you'll end up getting a bit of a growth hit.
I have a hypothetical for you, though, and it merges several of the themes that you've written on for so much. First of all, your book, "What Went Wrong with Capitalism," one of the central themes is excessive regulation. And in that book, you talk about the fact that there are 2,000 federal regulations added every year, and in the 50-year period you looked at, only 20 were taken off the books.
Yeah, the last is only 20 got taken out.
So what if this administration was more successful in pulling back regulation? Could that be a counter to hopefully the fiscal, you know, the pulling the fiscal deficit in and spending less? Could those two things balance in the United States over time?
Yeah, over time that could happen, but I think, you know, these things take a while to play out. My concern is that government spending has played a very powerful role in keeping the economy artificially high over the last two or three years, and that as that comes off in 2025, I think that you will get a bit of a growth vacuum before deregulation helps. And there's a very important point which brings me to one of the other trends that I speak about, which is the shift in the growth mix, that if you look at the growth in the last few years, it's been led by the big companies everywhere, the big companies, big tech companies. And remember, they are in a way the biggest beneficiaries of regulation because one, they're able to afford it, and two, they're able to sort of, you know, have regulation written like the way they want. They lobby much more effectively, they've got the resources, and they're there and they're pushing. Yeah, and so the big beneficiaries, in fact, if you have a serious deregulation drive, could be the small and midsize businesses. And you've seen even after the election, there's been a big pickup in their confidence.
Before the election, confidence of mid to small size businesses was at the lowest level outside of a recession. Like other big trend I have is a shift in the growth mix and even in the stock market performance, therefore, that some of the cap companies sort of slow down and some of the small to midsize businesses get a lift because of the deregulation drive. But my only caution here, that these things take a while to play themselves out before on the ground these things happen. So much of this is state level, so much of this is local, right? So the federal can drive only that much. But yeah, I'd say that. So one of the big trends I have is that this shift takes place in the growth mix in the coming.
That's interesting. That pulls together so many of your themes: deregulation impacting smaller companies more, and then small cap outperforming the big tech companies.
Yeah, in part because of the regulation being taken off of them that they can't afford in contrast to the big companies.
Yes. Let's move on to another trend, and this is artificial intelligence, which is, you know, maybe the game changer or, you know, the thing that we've got to figure out how it factors into what you're saying, because clearly there are people who believe that it's possible that this breakthrough technology, and it looks like it is, we'll see, you know, how it impacts business and employment over time, but could accelerate productivity and therefore growth, offsetting some of the, you know, hopefully lower government spending and things like that. How does AI fit into all of this from your vantage point?
Well, I think that one of the implications we could have of AI, at least again for 2025, is that the big strength of the tech company that investors would love, but they would generate so much free cash flow growth, right? Because they become so profitable and do that. Now, some of them are sitting on a half trillion dollars of cash right now. They're spending so much because on AI, it's become the gold rush. Everybody wants AI and stuff like that. I think there could be some, and it's expensive because you've got to get the, you're buying power, you're, you know, you're building plants to create the power for capex. There have been two drivers of economic growth in the US. What has been government spending? Second has been the capex that's been driven due to AI. Those are the two biggest.
Yeah, those are the two biggest, you know, drivers which have kept the American economy growing above its underlying trend.
But now I think that in 2025, some questions could be asked from investors and stuff that, okay, you're spending so much, where is the return? So this big strength that these companies had of generating massive free cash flow, I think some of that could come into question because it's already slowing down. If you look at the free cash flow growth of these companies, it's slowing down. So both earnings, free cash flow growth of these companies could slow down. And I think that investors could ask those questions more, and that is one of those things which could impact, I think, both the performance of these companies and also in terms of the overall economic momentum coming from AI for a while. Something we saw in the 2000s as well, that you had the internet revolution, huge, here to stay, no question that, but the companies who were the real beneficiaries of that, we only got to know a decade later.
And they were all, you know, and they struggled with profitability and with cash flow and everything else. Even Amazon back in '99, 2000 fell 90%.
And then it started a big journey up. So I think, but this linear forecasting today that, okay, that these are the companies which will benefit from AI as well, and they've been the big beneficiaries of that, they spend a lot, also benefit a lot, also, I think there's a bit of delusion there.
And what about AI, the impact on productivity and on jobs? You said to me when we first talked about this a year or two ago, really that recently, I mean, it's really been that it's just the last few years that never in history has a new breakthrough technology like AI cost more jobs than it's created. And we talked about some of the jobs that you would never, like in the 1990s, the notion of a search optimization engineer.
Now you have these people all over the place.
So do you still believe that AI over time, from a productivity and employment standpoint, is going to have a real positive impact on productivity without reducing, you know, employment and creating significant reductions in the number of jobs available in an advanced society like the United States?
Yeah, broadly. I mean, I still think that human ingenuity trumps still any, you know, machines and stuff like that. So the line that we had used earlier, which I still stand by, is that over history, what technology does is that it destroys professions, not jobs. And I still feel that is the operating line that I would use for the coming year. But I'm concerned the fact that this gold rush and then people finding, okay, what are the returns on it, those questions could be asked much more than 2025.
And you have a good example on that that you just gave, which is the internet.
Yeah, which it came and it was an explosion. Remember the late 90s, the hype around everything, clicks, and nobody cared about revenue. The companies were, you know, bid to tens of billions of dollars without really much financial success, and then it comes to a crashing halt. But the underlying technology keeps going and has changed the world.
Yes, yeah, so that's exactly, that's the template. Yes. Now, let's shift to another topic that you have spent a lot of time thinking about over many years, which is tariffs. And the incoming administration's already said on January 20th, when we take office, China, Mexico, and Canada, here are the tariffs you're going to get. You've heard back from some of those countries saying, okay, well, we're going to raise your tariffs. Where is this going in your eyes, and what's the impact on global economy, on US economy, and on investors?
Once again, I'm a bit concerned by the fact that most investors have reached this conclusion that these tariffs will hurt the rest of the world more than they'll hurt America. I think that that's a bit of a naive conclusion because the rest of the world is not just going to passively sit back and say, okay, these tariffs are coming and we're going to get hurt by them, and what's going to happen. We're already seeing action. You know, one of the very counterintuitive things, and I don't know how long this will last, but we'll see, is that since the election, one of the best performing markets in the world has been Mexico in dollar terms.
Yeah, partly because a lot of the bad news has been discounted before that you went into that, and partly also because there is this realization that America still needs Mexico for other things. So I think there is a sort of feeling, and this can still change, that maybe there's a deal to be done here, you know, which is the fact that if they don't come too hard on tariff for Mexico, Mexico obliges by, you know, being stricter on the border and other things. So I think there's, it's a very uncertain environment we're dealing with. In China's case, China, for example, may decide that, okay, if you're doing this, then we have to do much more to stimulate our economy now, much more to help consumption and stuff, which has been very depressed. So all of a sudden, China doesn't look that uninvestable anymore, which has become the thing. So I think this is the multi-factor model. The issue I have today is that everyone has a single factor that everyone's obsessed with. Everyone's obsessed with Trump. Everyone just speaks about as if that's the only factor that will matter in the world of investing. We know that's a dangerous thing. There are multiple, you know, there are multiple factors which matter. It's never a single factor model.
And so I think that one of the other big contrarian trends that we can speak about is that maybe the impact of Trump on the markets, on the global economy, the US economy, is not as much as people fear, especially people who fear a lot of downside from it. And here's another very interesting stat, and I think a lot of people forget that, that even though I don't believe it will happen again, about the best performing market in the world during Trump's first administration was China, if you look at the stock market.
Is that true? Yeah, I didn't know.
So the stock market did pretty well because the tech boom was really happening in China. The Tencents, the Alibabas, they were running away, and so they were able to also manage the tariff stuff as well. So, you know, things can play out pretty counterintuitively, is my point.
And right now, the belief is that the US will somehow get through it, and everybody else has got to pivot. And you're saying that that's the piece that there should be a counterintuitive lens on.
Exactly, because one, markets already discount stuff. Two, things are very stretched, as I've said, between us and the rest of the world. And three, that the rest of the world is not just passive. The other thing which could happen, as I mentioned in one of my top trends, is that the rest of the world could also decide to trade much more with each other.
Well, let's talk about that. But before we get to that, let's go back to China, because you were one of the first people years ago who was underweight China and said that, you know, there were issues around government involvement and things like that. And now that's become a widespread notion, and many investors have pulled back. Is this the time to reinvest in China, and have you changed your thought process at all there?
Yeah, I mean, I'm less bearish on China. I still feel that China's long-term problems aren't going away, which is the fact that they're losing people every year. The population is shrinking. No country in history has been able to grow significantly above 2% when your population is shrinking.
No exceptions to that. Just because it's the most important driver of economic growth along with productivity.
