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The power grid is arguably the backbone of modern society, and we&rsquo;re now at a critical convergence of the demand ramp-up of an increasingly electrified economy and an aging power grid that requires significant improvement, especially in incorporating more renewable but intermittent energy, such as solar and wind.
In addition, a significant bottleneck to the global expansion of data centers &mdash; facilities that organizations use to house their computer systems and related components &mdash; is the availability of power, and the grid is part of that bottleneck. The rapid expansion of data centers, coupled with the broad trend of rising electric vehicle penetration, is lifting power demand far beyond prior expectations.
Much of the grid was built decades ago &mdash; for very different patterns of power supply and demand &mdash; and is need of substantial improvements, including new power line construction and greater grid flexibility. But many obstacles stand in the way of grid modernization: &nbsp;high upfront costs, regulatory and permitting challenges and lack of coordinated planning, not to mention investments in technology and workforce training. There is also a lack of coordinated planning given the fragmented nature of the power sector, with multiple stakeholders and jurisdictions.
Resolving these obstacles requires government support, more private sector participation, and more innovative solutions beyond building more power lines. Governments need to have supportive policies and incentives to speed up grid modernization, such as grants, tax credits and simpler permitting processes. Facilitating public-private partnerships helps to share risks and leverage resources, as investors and project developers have different investment horizons and risk appetites. And yet, amid vast Energy Transition opportunities, which ones are the right ones?&nbsp;&nbsp;&nbsp;
Our new Must C report, Overcoming Gridlock: Powering Our Future, is about finding and evaluating these solutions.

Read the full report <a href="https://ir.citi.com/RFIY0yVkarXqDi9wlMN8WDbZLwUh1rIg3WrWBeinondwWUlq2BvLs-EdgDcS5k2-FSen48XtDwja_Vx4lI06FxLgKvL8xSp0z7v7oz3K9rc%3D" target="_blank" rel="noopener" data-link-source="tiny">here</a>, and listen to our accompanying podcast <a href="https://www.citigroup.com/global/insights/research-citi-e2-gridlock-the-global-power-problem" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

The power grid is arguably the backbone of modern society, and we&rsquo;re now at a critical convergence of the demand ramp-up of an increasingly electrified economy and an aging power grid that requires significant improvement, especially in incorporating more renewable but intermittent energy, such as solar and wind.

Overcoming Gridlock: Powering Our Future

The U.S. asset management industry is in the middle innings of an underlying secular shift toward exchange-traded funds (ETFs). Over the longer term, we expect that traditional mutual funds (MFs) will cede much of their assets under management (AUM) not attached to defined-contribution retirement plans. Advantages of an exchange-traded wrapper, combined with longer-term demographic shifts, will be the ultimate driver of this phenomenon. However, the ETF passive revolution is mostly behind. From here, its evolution will be increasingly down an active path. MF conversions remain topical, but mostly around an offensive vs defensive rationale. The embedded infrastructure related to the advisory channel and its suppliers is an important factor.
Currently there is approximately $25.5 trillion in US mutual fund AUM. Ex&ndash; money market mutual Funds (MMMFs), the amount is closer to $19.5 trillion. This relates to $8.5 trillion in US-listed ETF AUM. We project that $6 trillion to $10 trillion of non-MMMF mutual fund assets represents a potential target for ETF replacement. Of course, this is predicated on current market price levels, so the total could be higher or lower over time as a function of equity and debt market returns.
We have hypothesized in our ETF work over the years that the MF industry is at structural risk to ETFs. But there are gating factors to this. One is related to the nature of retirement plans and their funding. The other pertains to share class structures. That is, where an ETF can be offered as a share class alternative to an existing MF, cannibalization is a lesser issue.
Further, our bigger-picture view has been and continues to be that ETF industry innovation is pushing away from passive index replication and down the active management path. We expect that most new product innovation will be developed around an ETF/exchange-traded wrapper rather than via MFs. Additionally, the past several years of ETF launch activity supports a view that most traditional asset managers will consider augmenting in-house &ldquo;IP&rdquo; or investment acumen via ETFs in a &ldquo;wrapper agnostic&rdquo; manner. Conversions, parallel funds, and newer stand-alone ETFs all fall within this. Increasingly, traditional asset managers are looking for opportunities to invest in private companies alongside public markets as one means of differentiation.
Somewhat related, we suggest that much of the passive tailwind in the decade following the Global Financial Crisis (GFC) can be attributed to benign economic growth where Fed monetary policy struggled to trigger economic activity intended to avert disinflation concerns. During that timeframe, the mega-cap growth cohort of US equities benefited from both outsized earnings growth and the positive valuation read-through from low interest rates. Going forward, higher-than-previous inflation and interest rates could set up for an improved active management opportunity. All told, the next wave of ETF growth should be aligned with an active management bias, thus supporting our contention that traditionally active MFs need to contend/compete/align with exchange-traded alternatives.

Our new Must C report, Sizing the ETF Opportunity: From Passive Revolution to Active Evolution, presents our analysis of this ongoing paradigm shift, including the types of asset managers that will be best equipped to capitalize on it.
Read the full report <a href="https://ir.citi.com/DRbVZZ8xCszeJmQDOf4PVp9xuCpt2xDFa4kkl88nVcMto88u9wnYiSKrkWtv9adibJw7HExmu54bGj8RJK9cJfMSL6-fLMBl9RcMG7K02_1riV3YZ16fIQ%3D%3D" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

The U.S. asset management industry is in the middle innings of an underlying secular shift toward exchange-traded funds (ETFs). Over the longer term, we expect that traditional mutual funds (MFs) will cede much of their assets under management (AUM) not attached to defined-contribution retirement plans.&nbsp;

Sizing the ETF Opportunity: From Passive Revolution to Active Evolution

Global Equities

International Markets

Macroeconomics

China and the U.S. are increasingly jostling over semiconductor intellectual property and manufacturing. The U.S. is seeking to jump-start its own chip production, while using sanctions to blunt China&rsquo;s drive for self-reliance in this critical industry. A new Must C report from a team led by Chris Danely looks at the two powers&rsquo; battle for supremacy.
The semiconductor industry is the driving force behind technological innovations such as artificial intelligence, electric vehicles and factory automation. Consequently, the industry, is crucial to nations&rsquo; economic prosperity and national security. The U.S. accounts for 25% of total semiconductor demand, but its total semiconductor manufacturing capacity is just 12%, down from 37% in the 1990s. This decline has sparked concerns about a threat to national security given China&rsquo;s efforts to gain a significant foothold in the industry.
A key focus of our analysis is the CHIPS and Science Act, which became U.S. law in 2022. Its aim is to boost domestic chip production by earmarking $52.7 billion for allocation over five years to develop domestic manufacturing, as well as R&amp;D and workforce programs. The act provides 25% investment tax credits to semiconductor companies that invest in semis manufacturing or specialized tooling equipment, as noted in our report, conditions introduced by the Commerce Department have made it challenging to turn the act&rsquo;s goals into realities.
Returning leading-edge semiconductor manufacturing to the U.S. could prove extremely difficult. By one estimate, it could cost up to 50% more to make leading-edge chips in the U.S. than in Taiwan. And most semiconductor companies are already raking in profits and don&rsquo;t need extra funding, meaning only less-profitable firms may participate in the CHIPS Act.
The European Union is countering China with the European Chips Act (ECA), which aims to double Europe&rsquo;s share of global chip manufacturing by 2030. The ECA lacks the CHIPS Act&rsquo;s restrictions, and European chip makers seem to have few, if any, reservations on accessing its funding. Meanwhile, Japan&rsquo;s 2022 Economic Security Promotion Act is key to its own effort to establish semiconductor production facilities.
The CHIPS Act isn&rsquo;t the only tactic deployed in the U.S.-China chips rivalry: The U.S. and its allies are also using sanctions as a tool against China. Such restrictions have limited China&rsquo;s ability to acquire and make advanced chips, with an emphasis on items or technologies used for supercomputing and AI training.

Our new Must C report, The U.S.-China Chip Rivalry &ndash; A Battle for Semiconductor Manufacturing Supremacy, also includes a Q&amp;A with semiconductors expert Chris Miller and a graphical overview of the industry.
Read the full report&nbsp;<a href="https://ir.citi.com/kV_qA_ti_-GZ4yZ_bFOrEd7bY1NK-OcvyBfYJpCI7EVhKok24ETi2uL9ngZNZBmi1_XL-0BLJ3Ey-A-kGFSbudPfYcOZCPhrSQpA6Dm1ED53XLaRkhrVFpvUvfr54Cpe" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

China and the U.S. are increasingly jostling over semiconductor intellectual property and manufacturing. The U.S. is seeking to jump-start its own chip production, while using sanctions to blunt China&rsquo;s drive for self-reliance in this critical industry. A new Must C report from a team led by Chris Danely looks at the two powers&rsquo; battle for supremacy.

The U.S.-China Chip Rivalry – A Battle for Semiconductor Manufacturing Supremacy

Our inaugural Must C report looks at the debt situation from historical, international, and macro perspectives, with our analysis organized around 10 key questions. We reach several conclusions, which we explore in more detail in the report:
<ul>
<li>As debt levels rise, we have no way to predict danger thresholds or how much debt is &ldquo;too much.&rdquo; But we think it&rsquo;s unwise for policymakers to experiment or test where these thresholds might be. In our view, the prudent path for fiscal policy is, at a minimum, to not push debt further upward from today&rsquo;s elevated levels. But we admit that we have little hope of meaningful remedial action in the foreseeable future.</li>
</ul>
<ul>
<li>We don&rsquo;t see a full-blown adverse scenario as likely, but last year&rsquo;s UK gilt crisis still stands as a cautionary tale. The hallmark of an adverse scenario would be a sharp, unexpected deterioration in market appetite for Treasuries, leading to sharply higher Treasury yields and rising risk premiums in credit and equity markets. Given the dollar&rsquo;s status as a reserve currency, these stresses would be quickly transmitted to financial markets abroad.</li>
</ul>
<ul>
<li>We think the most likely scenario is that markets&rsquo; discomfort about the U.S. debt trajectory will eventually fade, with the situation broadly reverting to the more relaxed pre-COVID configuration, and only modest premiums will be required to absorb the forthcoming issuance. If we&rsquo;re right, the core strengths of the U.S. economy will give investors the confidence to purchase Treasuries, notwithstanding high debt levels and political noise. And at the end of the day, there are few alternatives to Treasuries.</li>
</ul>

Our new Must C report, The Ever-Rising US Public Debt: Ten Questions &amp; Answers, analyzes the debt situation from multiple perspectives.
&nbsp;Read the full report <a href="https://ir.citi.com/3u9NXj1cXcXmnK86-cXWXCoAIxvpzoYP_g2N61qjA5aS1r41YmEvbPJ6EloxP5TN1Auyuqw1njVBpyrmhSXbd-i_OBNqiBq0kckR2cEsjUZowGwbdUEHox1OQL4TvhQi" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

In recent months financial markets have grappled with concerns about the U.S. government&rsquo;s rising debt, worrying about who will buy the forthcoming issuance of Treasuries (which could total $20 trillion over the next decade) as well as about how much debt is &ldquo;too much.&rdquo; What would a full-blown crisis in the U.S. Treasury market look like, and what could trigger one?

The Ever-Rising U.S. Public Debt – Ten Questions and Answers

&ldquo;Geopolitical risk&rdquo; is a sweeping term that encompasses military confrontations, diplomatic standoffs, cyberattacks, sanctions programs and tariffs, with channels of transmission including global trade, supply chains, capital flows and financial markets &ndash; especially commodities markets. A new Must C report from a team led by Nathan Sheets considers the effects of recent geopolitical shocks, including the Russia-Ukraine war and the escalating conflict in the Middle East. We also discuss longer-term structural developments such as the rise of China and other BRICS nations and the increased prominence of populist political voices. And we consider how investors should navigate geopolitical complexities.
Over the last 50 years, commodities and commodity-producing countries and regions have generally played a central role in the onset and transmission of geopolitical shocks. A key question: How will the ongoing transition to renewables and decarbonization influence this dynamic? While it&rsquo;s plausible that geopolitical pressures will become less frequent, it&rsquo;s more likely that tensions will shift to other goods and services, such as advanced semiconductors, rare earth metals, copper or even the availability of data.
There&rsquo;s a common perception that geopolitical shocks are becoming more frequent and severe, but a look at an index of geopolitical risk prepared by Fed researchers finds little support for that idea. Still, given the array of pressures in play, investors would be well-advised to prepare for the possibility that such pressures may become more intense. Another consideration is that national authorities look to have become more reliant on economic tools to achieve their political objectives &ndash; to note two examples, coordinated sanctions have been a prominent response to Russia&rsquo;s invasion of Ukraine, and the U.S. has made heavy use of economic tools in dealing with China.
From a macroeconomic standpoint, we conclude that geopolitical challenges typically affect the economy as supply shocks and tend to result in slower growth and (at least through a transition period) higher inflation. Unfortunately, this presents central banks with a Hobson&rsquo;s choice: tighten policy to fight higher inflation and so risk further weakening the economy, or ease policy to support economic activity and so risk still higher inflation.
Geopolitical challenges, in our view, have been a reality for generations and are likely to remain one. Investors would be wise to become well-versed about their dimensions and likely implications, taking care to neither underestimate nor overestimate their significance.

Our new Must C report, Geopolitics &ndash; Implications for the Economy &amp; Markets, also looks at the differing effects of geopolitical pressures on developed-market and emerging-market economies and offers an empirical assessment of how markets respond to such shocks. Read the full report <a href="https://ir.citi.com/PA4_8IpLnAeROj0OgAkKBs_ETtiEt9-lS9vnKzEipHvLMxakAt5P-kAUSICmp4oSiYrudXUb5BCUgqNyQmETGEZuuiy3zGKAY5G-1cMIIOE%3D" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

&ldquo;Geopolitical risk&rdquo; is a sweeping term that encompasses military confrontations, diplomatic standoffs, cyberattacks, sanctions programs and tariffs, with channels of transmission including global trade, supply chains, capital flows and financial markets &ndash; especially commodities markets. A new Must C report from a team led by Nathan Sheets considers the effects of recent geopolitical shocks, including the Russia-Ukraine war and the escalating conflict in the Middle East. We also discuss longer-term structural developments such as the rise of China and other BRICS nations and the increased prominence of populist political voices. And we consider how investors should navigate geopolitical complexities.

Geopolitics – Implications for the Economy & Markets

As investors embark on strategies for 2024 &mdash; which is already shaping up to be another year of twists and turns &mdash; what are the most compelling themes that bear watching across the globe? Citi Research&rsquo;s Global Strategy and Macro Group (GSMG) addresses the question in a recently published Must C report led by&nbsp;Dirk Willer, Head of Macro, Asset Allocation, and Emerging Markets Strategy, and Jabaz Mathai, Head of G10 Rates and FX Strategy.&nbsp;
Ten Themes for Investing in 2024
<ol>
<li>
Delayed Easing Cycles &ndash; Citi generally expects developed market (DM) central banks to start cutting rates later than the market is currently pricing in.
</li>
<li>
Higher Inflation Risk Premium &ndash; Breakeven inflation rates compressed substantially in DM bond markets in 2023. As central banks start cutting rates this year, our strategists think the inflation risk premia can rise with easing financial conditions.
</li>
<li>
Diverging Growth, Diverging Central Banks &ndash;&nbsp; Citi expects to see divergence between Norway and Sweden on growth, inflation, and central bank FX activity. On growth, Citi economists see a soft-landing scenario for Norway and rate cuts not starting until the end of this year. This contrasts with a persistent, mild recession in Sweden as high rates weaken private consumption and business investment.
</li>
<li>
Broadening EPS, Broadening Markets &ndash; Our equity strategists see EPS broadening as a key dynamic to watch. Last year, earnings growth varied widely across regions, and was often concentrated in a few key sectors. This year, nearly all major regions should see positive EPS growth, with most sectors contributing positively. The team believes this environment will ultimately favor cyclical markets and sectors.
</li>
<li>
Recession in Mid-2024 &ndash;&nbsp; A recession is our economists&rsquo; base case for the United States, beginning in the middle of the year. The increasing effects of the Fed&rsquo;s aggressive hiking cycle&mdash;including tightening bank lending conditions, signs of strain in lower-income households, and a labor market that may be starting to loosen&mdash;point to gradually mounting recessionary pressures.
</li>
<li>
BoJ to Go Slow &ndash; With the Fed and European Central Bank clearly pivoting their policy stances, there is little pressure on the Bank of Japan to tighten monetary policy further. Our Japan rates strategists maintain their monetary policy outlook, with a baseline scenario of a U.S. recession in mid-2024 and simultaneous termination of Japan&rsquo;s yield curve control and negative interest rate policy in April 2025.
</li>
<li>
Chinese Stimulus &ndash; The worst of China&rsquo;s growth fears are receding as policy kicks into action, albeit selectively, with spending oriented toward the &ldquo;three major projects&rdquo; of social housing, urban-village redevelopment, and dual-use infrastructure (for both everyday and emergency use). That said, our strategists believe private sector sentiment may still struggle to recover, given that December&rsquo;s annual Central Economic Work Conference provided no hint of massive consumption support policies nor new policy indications for the property sector.
</li>
<li>
Good Times in EM &ndash; Our emerging markets strategists see inflation in the region continuing to improve as oil and global food prices have been under downside pressure and likely falling within target ranges. With inflation coming close to target, high real ex-ante interest rates suggest central bank cuts, even if growth does not weaken substantially (though weaker growth should be expected and would of course speed up potential rate cuts).&nbsp;
</li>
<li>
The Elections That Matter &ndash; 2024 is one of the biggest election years in history, with more than half the world&rsquo;s population voting. Even so, many of the elections will not be overly market moving, either because outcomes are already relatively clear&mdash;or relatively benign for markets&mdash;no matter who wins. The biggest exception is the U.S. election. Although that one is far out, our strategists believe hawkish sentiment towards China will be a bipartisan issue. The UK election, which could take place late in the second quarter, may also be relevant in the local context.
</li>
<li>
Energy Infrastructure &ndash; The Energy Transition will have broad demand impacts on commodities, but some could take more time to materialize, given the overlapping use of certain commodities in more traditional sectors currently affected by a weak macro environment. The first one to play out could be U.S. natural gas exports, primarily via liquid natural gas (LNG). Since a new wave of U.S. LNG export terminals should enter into service, then the natural gas demand rise that requires a corresponding supply increase would lift prices.
</li>
</ol>
&nbsp;

Existing Citi Research clients can access the full report, Investing in 2024: Themes and Trades, <a href="https://www.citivelocity.com/t/eppublic/2xIWb" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

As investors embark on strategies for 2024 - which is already shaping up to be another year of twists and turns - what are the most compelling themes that bear watching across the globe? Citi Research&rsquo;s Global Strategy and Macro Group (GSMG) addresses the question in a recently published Must C report led by&nbsp; Dirk Willer, Head of Macro, Asset Allocation, and Emerging Markets Strategy, and Jabaz Mathai, Head of G10 Rates and FX Strategy.&nbsp;

Investing in 2024

The U.S. general elections on November 5 will feature competitive races for control of the White House, the House of Representatives and the Senate. A Biden&ndash;Trump rematch looks likely, despite low national support for both candidates. &ldquo;Double-hating&rdquo; Biden&ndash;Trump voters in six swing states will play a pivotal role in determining the outcome. What happens at the top of the ticket will largely determine down-ballot races for the House and Senate. This leaves the closely divided House a toss-up and gives Republicans an early advantage in the Senate cycle.
The following are some of the major takeaways from our Must C report:
<ul>
<li>
President Biden and former President Trump are the frontrunners for their parties&rsquo; nominations. A majority of pledged delegates will be allocated by mid-March, meaning the window is closing fast for primary voters to choose someone else in either party. As soon as late March or early April, the frontrunners could receive a majority of pledged delegates to become their presumptive party nominees. Barring an unexpected development, Biden and Trump are heading for a rematch. The election calendar also coincides with the legal calendar for Trump&rsquo;s four criminal cases. Trials are expected to last at least two to three months and are unlikely to occur concurrently; no trial will finish before Trump becomes the presumptive nominee.
</li>
<li>
Should either candidate withdraw from the race, how a new nominee is chosen and by whom depends on timing. If that happens before the party convention, a nominee will be chosen based on who can receive a majority of primary delegates, with a competition for delegates if no candidate reaches a majority. If a candidate withdraws before ballots are printed, either the Democratic National Committee (DNC) or Republican National Committee (RNC) will choose a replacement based on party rules. If ballots have been printed but it&rsquo;s before Election Day, the DNC or RNC will choose a replacement but the candidates will remain on the ballots, with Biden or Trump electors told to vote for the replacement during the Electoral College count. If it&rsquo;s after Election Day but before the Electoral College count, it will be up to electors to choose, with the decision going to the House if no candidate receives a majority of the Electoral College. Finally, if such an event happens after the Electoral College count but before the inauguration, the Vice President-elect will become President.
</li>
<li>
The election will come down to tens of thousands of voters in six states: Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin. Today Trump appears to be the favorite, as he&rsquo;s leading in an aggregate of polls nationally and in five of the six swing states. But Election Day is more than eight months away.
</li>
<li>
Biden&rsquo;s unfavorable rating is 58%, while Trump&rsquo;s is 57%, with 16% of voters disliking both candidates. One of the most important questions for 2024 is what these &ldquo;double-hating&rdquo; voters will do: fall in line, vote for a third-party candidate, or stay home.&nbsp;
</li>
<li>
The close presidential race leaves control of the House too close to call; there&rsquo;s a good chance whichever party wins the White House also wins the House. Meanwhile, Republicans hold a geographic advantage in the Senate; there, Democrats&rsquo; best possible outcome is a 50&ndash;50 split Senate, with the Vice President as the tie-breaking majority. A final factor of note is candidate quality: Republicans have lost several winnable House and Senate races in the past by nominating controversial candidates.
</li>
</ul>
&nbsp;
&nbsp;

Our new Must C report, The U.S. Elections &ndash; Buckling Up for Volatility, also features strategy notes from our analysts spanning a range of assets.
Read the full report&nbsp;<a href="https://ir.citi.com/L9iG9l8CdDJd86zLtMcDATrPu7qzoVl3Zd6Ucy5SkmDFaKxLlwbb0ZhE59jTlnvbRj63kdouvQI1RDZLqpMwAHK2QFQIParM-vPmzqb9HRc%3D" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

The U.S. general elections on November 5 will feature competitive races for control of the White House, the House of Representatives and the Senate. A Biden&ndash;Trump rematch looks likely, despite low national support for both candidates. &ldquo;Double-hating&rdquo; Biden&ndash;Trump voters in six swing states will play a pivotal role in determining the outcome. What happens at the top of the ticket will largely determine down-ballot races for the House and Senate. This leaves the closely divided House a toss-up and gives Republicans an early advantage in the Senate cycle.

The U.S. Elections – Buckling Up for Volatility

Research

In a new Must C report, a team led by Nathan Sheets delves into the global economy&rsquo;s digital transformation, which has seen a shift from ecosystems characterized primarily by flows of physical goods to ones predicated on data and information. A key result of this shift has been increased efficiency, a trend that seems likely to accelerate given the recent emergence of generative AI, or GenAI. The digital economy looks poised to be a key driver of global economic growth through the coming decade.
This digital transformation consists of three related processes: digitization of existing activities; the development and production of physical goods needed to support the digital economy or interact with it; and the emergence of new types of activities that weren&rsquo;t feasible (or even conceivable) in the physical economy. That adds up to an expansive footprint: Roughly two-thirds of the global population accessed the internet last year, and Facebook has 3 billion active users.
There&rsquo;s no settled methodology as to how the digital economy should be defined or measured. For the U.S., a narrow measure puts it at 7% of nominal GDP; a broad measure yields an estimate of more than 20%. But however it&rsquo;s measured, it&rsquo;s clear that the digital economy is expanding rapidly. According to the U.S. Bureau of Economic Analysis, the nation&rsquo;s digital economy grew more than 7% annually during 2017&ndash;2022, vs. 2.2% for the overall economy. The increasing adoption of GenAI should allow this growth differential to continue at least through the coming decade, driving further increases in the digital economy&rsquo;s share of GDP. Indeed, we see few practical limits to how high this share could go.
In our report, we consider developments in key industries that produce digital products &mdash; hardware, software and the internet &mdash; as well as &ldquo;downstream&rdquo; industries feeling appreciable effects, such as electrical equipment, retail, and media &amp; entertainment. AI&rsquo;s rise is driving demand for more sophisticated chips, faster and more flexible networking equipment, and increased data-center capacity, as well as software and internet services. AI-related spending on hardware, software and services could grow 30% annually over the next few years. Downstream firms are also seeing benefits, and the &ldquo;creator economy&rdquo; is transforming advertising, entertainment, and social media. For example, online advertising now accounts for 70% of overall spending on advertising.
The bottom line is that we are optimistic about the opportunities the digital economy and GenAI are likely to bring, though we acknowledge there are challenges to be addressed, from building a supportive legal and regulatory environment to reducing vulnerabilities to deepfakes, hacks and cyberattacks. At the company level, these new technologies will need to be broadly adopted and integrated into existing workflows. This will require investment and training, and rethinking of ways that business is done.

Our new report, The Digital Transformation of the Global Economy, is available in full <a href="https://ir.citi.com/WNQZbZAtdOGI67eBo8Z2lWueZ1F1IULUosPCoUIbxCOvqZZiyktzeR1AZp4gXTi3zUJAspvi10fkKecqqjhyTkNTRyMFeoSre4YjEh5V17asoaVQc4tYXlyUxM7tFKuc" target="_blank" rel="noopener" data-link-source="tiny">here</a>.
&nbsp;
Listen to the related Research @ Citi podcast episode <a href="https://www.citigroup.com/global/insights/e8-the-digital-transformation-of-the-global-economy" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Riding the Wave of Virtual Progress

In a new Must C report, a team led by Nathan Sheets delves into the global economy&rsquo;s digital transformation, which has seen a shift from ecosystems characterized primarily by flows of physical goods to ones predicated on data and information.

The Digital Transformation of the Global Economy

A reshaping of defense spending over the last decade has bolstered the outlook for legacy defense contractors while letting venture-backed companies begin changing the face of the industrial base ecosystem. In this Must C report we look at the outlook for defense spending and offer insights about Western allies&rsquo; priorities.
A new report from a team led by U.S. Aerospace &amp; Defense analyst Jason Gursky looks at the state of global defense spending, which has been rising since Russia&rsquo;s 2015 invasion of Crimea. Since then, new factors at play have bolstered the outlook for legacy defense contractors and let venture-backed companies begin changing the face of the industrial base ecosystem. At the same time, deficits and debt have continued growing for most Western economies, spurring questions about the sustainability and prioritization of government spending. The report, which draws on views from Citi Research economists and equity analysts, looks at the outlook for defense spending and offers insights about the spending priorities of Western allies in this evolving landscape.
Here are seven takeaways from the report:
Defense-spending scenarios: We consider three scenarios. In the first, spending steps down as the Ukraine conflict is resolved and national security concerns take a step back given other priorities. In the second scenario (our base case), defense spending continues at current levels amid geopolitical concerns, with the composition of that spending shifting from personnel and material to equipment and countries seeking to make spending smarter, including by integrating AI. And in the third scenario, spending increases in both the EU and the U.S., driven by either the onset of some broader or more pronounced conflict or a reframing of the &ldquo;great power&rdquo; competition with China in more military terms.
The great power competition and U.S. spending: The U.S. updates its National Security and National Defense doctrine every four years, with the most recent update in 2022. Doctrine has shifted away from a focus on the war on terror to a seemingly warmer cold war in which nations actively compete for regional and global dominance. The Ukrainian conflict, China&ndash;Taiwan tensions and the Israel&ndash;Hamas conflict are all recent developments motivating U.S. policymakers to prepare to deter and if necessary, fight conflicts on three fronts.
Europe&rsquo;s NATO commitments: NATO member states spending less on defense than their commitments sparked friction in the late 2010s and early 2020s between Europe and the U.S., which consistently spends a greater percentage of its GDP on defense. U.S. criticism of European underspending looked prescient following Russia&rsquo;s 2022 invasion of Ukraine; European countries are now reassessing their capabilities and reinforcing the need for a much stronger European Defense Industrial base, with their spending moving to higher levels.
New spending priorities: Recent conflicts in the Ukraine and the Middle East, as well as China&rsquo;s rise, have brought lessons that have informed spending priorities. In addition to recapitalizing nuclear deterrence capabilities, allies are prioritizing areas including Space, Unmanned Aerial Vehicles and Attritable Aircraft (the latter are unmanned craft that can be reused but are affordable enough to risk losing), AI and Missile Defense. All of these areas are growing more quickly than overall defense spending, and in many cases they&rsquo;re being addressed by both legacy contractors and new entrants, which are often backed by venture capital.
An evolving industrial base: Large defense primes still dominate such well-known platforms as fighter jets, tanks and aircraft carriers. But the Department of Defense (DoD) has been pursuing alternatives as it looks to acquire innovative technologies that could position the U.S. to stay ahead of its peers. New companies have emerged as alternatives to traditional suppliers for the rapid development and deployment of &ldquo;next generation&rdquo; capabilities.
A new catalyst of change: The Defense Innovation Unit (DIU) was created in 2015 as the DoD looked to reengage Silicon Valley and other technology hubs. Its mission focuses on identify technologies that can support DoD efforts and keep those technologies out of adversaries&rsquo; hands. As part of this effort, the DIU provides contracts to keep companies out of the &ldquo;valley of death&rdquo; while awaiting the often-slow contracting process and helps tech companies partner with larger primes.
Venture capital and the ecosystem: DIU successes and a more menacing geopolitical environment have helped drive a resurgence of venture investing in the defense tech sector, with more than $70 billion deployed in the past two years. Most of the large defense primes have established and funded corporate venture arms, allowing them to invest either on their own or together with institutional backers.

The full report, Must C: Money and Might &mdash; Financing the Future of Defense, is available <a href="https://ir.citi.com/xxA_oQFCRY3MwZQG8LjbXdxmhq2RaR2kdctiyZrWUTOqwxaiUqprZ98elWhzVsZt-1G-Tesu-O_YCphKQGLZhVIhUbUOFdvzIzPLw8yWryI%3D" data-link-source="tiny">here.</a>

A reshaping of defense spending over the last decade has bolstered the outlook for legacy defense contractors while letting venture-backed companies begin changing the face of the industrial base ecosystem.

Money and Might — Financing the Future of Defense

Article

In a world hurtling toward a relentlessly connected digital economy, the expectations for how money functions are evolving. Whether domestic or cross-border, we now demand that payments operate seamlessly: instant, available around the clock, intuitive and transparent. But the traditional banking system sometimes falls short of this standard, especially when it comes to international transactions. This raises a fundamental question: can conventional forms of money adapt to the demands of the digital age, or are we on the cusp of a new era where digital currencies will power our financial future? Read the full article <a href="/rcs/citigpa/storage/public/cbs38461_The Evolution to Digital Article_v10.pdf" target="_blank" rel="noopener" data-link-source="tiny">here.</a>

In a world hurtling toward a relentlessly connected digital economy, the expectations for how money functions are evolving.&nbsp;

Money: The Evolution to Digital

Citi’s Research team leverages expertise across all asset classes and regions to provide our clients with independent analysis of financial markets, economies, industries and companies.

In a new Citi Research Must C report, Chief Economist Nathan Sheets and team look at foreign direct investment (FDI) and the potential global implications of Trump administration policies.&nbsp;

Foreign Direct Investment — Global Implications of "America First" Policies

Quick, expert-driven articles that address key financial and economic themes with actionable takeaways, market perspectives, and research-backed insights.

Must C - From Citi Research 

<ul><li>Trump inherits a strong U.S. economy, while the global economy has shown dogged resilience.</li><li>Our “baseline Trump scenario” sees Trump 2.0 policies as a complex mix, with tariffs a major source of uncertainty.</li><li>Tariffs are by the far the largest source of concern for the rest of the world.</li></ul>

In our new Must C report, a team led by Chief Economist Nathan Sheets looks at the economy Trump inherits in his return to the White House and the new unknowns introduced by his reelection.<o:p></o:p>Trump becomes president again with a U.S. economy that has been the best performing among major developed markets, powered by a resilient consumer and a strong corporate sector. Meanwhile, the global economy continues to display dogged resilience and looks poised for another year of near-trend performance.<o:p></o:p>At the same time, Trump brings new unknowns to the economic outlook. We examine a “Baseline Trump Scenario” that includes tariff hikes (especially on China), an extension of the 2017 Trump tax cuts, sharp curbs on immigration, broad deregulation of Biden-era requirements, and a potential boost to animal spirits — emotional factors that influence consumer and investor confidence. We recognize broad uncertainty around each policy area, but offer our best guesses about how these areas will evolve.<o:p></o:p>Our conclusion is that Trump’s policies represent a complicated mix of favorable and adverse supply and demand shocks. For U.S. economic growth, our forecast envisions these effects as perhaps balancing out. For U.S. prices, the effects look to skew toward some moderate upward pressures. The clear implication is that over the coming year, the Fed will need to remain alert for signs of emergent inflation pressures, and monetary policy may need to be a bit tighter.<o:p></o:p>For the rest of the world, Trump’s tariff policies are by far the largest source of concern, with countries subject to tariffs facing an adverse demand shock as their access to the U.S. market diminishes, threatening to weaken growth and lower inflation and possibly requiring non-U.S. central banks to be more stimulative with policies.<o:p></o:p>In our view, an important framing thought is that we’ve already seen Trump in the White House. During his earlier term, he was assertive in his rhetoric and policies but ultimately avoided actions that were seriously disruptive, and the economy and the markets generally performed well during his tenure.<o:p></o:p>Looking around the world, China’s economy faces significant downside risks from the possibility of large tariffs. Europe also faces a range of question marks for Trump’s second term, particularly in the areas of tariffs and security. Many of Trump’s core policy concerns also touch Latin America in one form or another, with Mexico looking most exposed but Brazil and Panama additional names to note.<o:p></o:p>Turning to financial markets, we see little worry for broader U.S. equity indexes in a targeted tariff regime, especially since many corporates were granted carve-outs in Trump 1.0 and companies can pass through these costs. On the other hand, broader tariffs could bring a more meaningful hit to margins. Equity markets outside the U.S. are likely to get hit even harder in various tariff scenarios, and felt sizable headwinds from Trump 1.0 tariffs.<o:p></o:p>From a broad perspective, asset prices in 2025 will be significantly driven by the path of Trump’s policies. Uncertainty is likely to persist and be a feature of Trump’s presidency; Trump seems to thrive in a world of ambiguity in which his political opponents and international counterparts aren’t clear about his next move. In our view, investors who stay nimble but also focused on underlying strong economic fundamentals are likely to reap benefits.<o:p></o:p>The full report, Must C: Trump 2.0 – Expectations for the Economy and Financial Markets, also includes perspectives on Trump 2.0 from other economies and regions and is available <a href="https://ir.citi.com/CQN-iswtGFQCZSCX7ZSmwx8EGfV1V10dJ5MQzYBh-VY7neE2bjaEtWD1PlegBWaJIX_UsmLNscAqevTN1OCD16a_KP9638ISVSYghcJqSBA%3D" target="_blank">here</a>.<o:p></o:p>

In our new Must C report, a team led by Chief Economist Nathan Sheets looks at the economy Trump inherits in his return to the White House and the new unknowns introduced by his reelection.

Trump 2.0: Expectations for the Economy and Financial Markets

<ul><li>The U.S. share of global foreign direct investment (FDI) has risen in recent years, while the European Union, UK and China have seen tepid flows.</li><li>We expect global FDI flows to continue their flat trajectory, averaging around $1.5 trillion annually.</li><li>We see risks skewed toward a strengthening of FDI, though the implications of Trump administration economic policies strike us as a pivotal question for the U.S. economy and the entire global system.</li></ul>

Note to readers: Access the full report <a href="https://ir.citi.com/z_uHeVkh6705ka7JQGF880asUbFP1wAuptreipFTOk2-hz-g0Pw_naIEK7Na0eKbLoAa0OnhSk0aT82zQbwMPXRHQuAFlNJU" target="_blank">here</a>In a new Citi Research Must C report, Chief Economist Nathan Sheets and team look at foreign direct investment (FDI) and the potential global implications of Trump administration policies.&nbsp;As President Trump reconfigures U.S. economic policies, the implications for foreign investment in the U.S. strike us as a pivotal question, with the eventual answer not only influencing the path of the U.S. economy but also having implications for the entire global system. We see several offsetting forces in play. One of President Trump’s explicit objectives is to make the U.S. an attractive target for foreign investment and to incentivize these flows. But the marked rise of policy uncertainty is likely to serve as a disincentive, as foreign investment flows typically gravitate to stable and predictable policy regimes. On balance, we remain cautious about the outlook for foreign investment to the U.S. but also constructive, given our view that the economy’s underlying fundamentals continue to look strong.&nbsp;In our Must C report, we explore the features, role and drivers of global FDI flows, with a particular though not exclusive focus on the U.S. Across the various classes of capital flows, FDI is seen as a powerful driver of economic growth and development. While FDI comes in many forms, it generally entails foreign investors taking relatively large, long-term and stable positions in the recipient country.FDI can be interpreted as a gauge of investor sentiment about a country’s longer-term prospects. FDI is drawn to countries with attractive business climates, a proven commitment to the rule of law, and strong and stable economic performance. But the presence of FDI also helps reinforce favorable economic outcomes and policies, as foreign investors contribute their expertise and resources to bolster an economy’s performance.We note that the U.S. share of global FDI has risen in recent years. We see this increase as reflecting several factors, including ongoing reshoring flows, investment in the chemicals sector (particularly in pharmaceuticals) attracted by cheap and abundant natural gas, the success of the CHIPS and Inflation Reduction Acts, and pull from the burgeoning U.S. AI sector. Favorable U.S. growth prospects have no doubt also played a role.Meanwhile, the European Union (EU), UK and China have endured tepid flows in recent years. For the EU this reflects a cocktail of challenges including weak domestic demand, an uncertain energy portfolio and continuing overhang from the Russia-Ukraine conflict. The UK has faced similar challenges, as well as the long positioning post-Brexit. We see the headwinds for FDI inflows to China as more structural, with investment and sourcing systematically moving away from China as a result of geopolitical pressures and related shifts in firms’ production management strategies.The U.S., EU, UK and China together account for two-thirds of global FDI positions. Our work suggests FDI is drawn to large economies given their generally attractive domestic markets and sizable labor pools. But several trade and financial centers including Luxembourg, Switzerland and the Netherlands hold large positions as well.&nbsp;More broadly, global FDI flows have declined markedly as a share of GDP. These flows averaged 2.5% a year from 2005 through 2017, but have stepped down to around 1.5% since 2018. We see this as a signal of slowing in the globalization process.FDI is ultimately attracted by key features of a country’s economy. These attractors include the size and growth of its markets and the availability of low-cost or highly skilled labor resources. A desire to diversify production or reduce frictions such as transportation costs or tariffs may also be in play.A looming question is the prospect for these flows going forward. A reasonable expectation is that global FDI flows will continue their flat trajectory and average around $1.5 trillion annually. Around this flat baseline, we see risks as skewed toward a strengthening of FDI. First the decline in EU FDI looks to have a cyclical component that could reverse. Second, while the weakness of FDI to China looks more structural than cyclical, we see more upside than downside risks from current levels. Third, we think countries such as Mexico and India are benefiting from a rebalancing of investments as firms diversify their production from China, an important trend that should become more apparent over time.Of course, as emphasized above, a related and if anything more critical set of issues involves the attractiveness of the U.S. as a target for FDI and the global implications of Trump administration policies.

Our new Must C report, Foreign Direct Investment — Global Implications of "America First" Policies, is available in full to existing Citi Research clients <a href="https://ir.citi.com/z_uHeVkh6705ka7JQGF880asUbFP1wAuptreipFTOk2-hz-g0Pw_naIEK7Na0eKbLoAa0OnhSk0aT82zQbwMPXRHQuAFlNJU" target="_blank">here</a>.

Must C - From Citi Research

IN THIS SERIES

Foreign Direct Investment — Global Implications of "America First" Policies

Trump 2.0: Expectations for the Economy and Financial Markets

Money and Might — Financing the Future of Defense

The Digital Transformation of the Global Economy

Sizing the ETF Opportunity: From Passive Revolution to Active Evolution

Overcoming Gridlock: Powering Our Future

Geopolitics – Implications for the Economy & Markets

Investing in 2024

The U.S.-China Chip Rivalry – A Battle for Semiconductor Manufacturing Supremacy

The U.S. Elections – Buckling Up for Volatility

The Ever-Rising U.S. Public Debt – Ten Questions and Answers

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