EquitiesJan 16 2020

US equities dominate the investment landscape

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Supported by
DO NOT USE T Rowe Price
US equities dominate the investment landscape

It is a sign of the esteem in which investors hold US shares that the country’s equity market comprises 57 per cent of the MSCI Index, and so an investor buying a global tracker fund has that level of exposure to the US, despite the actual economy being just 15 per cent of the global economy.

Fahad Kamal, chief market strategist at wealth manager Kleinwort Hambros, told FTAdviser that US equities are popular with investors all over the world due to the liquidity of that market, meaning investors are always able to sell their holdings easily.

He said that from a portfolio construction point of view, the starting point for a typical client in a balanced portfolio should be to hold 57 per cent in global equities to match the weighting of the index.

US equities

He said: “But of course there are times when the US market looks very expensive, and you would maybe have 20 per cent less than that in the US, or times when it is not an expensive market at all, and quite an attractive market, and you would perhaps have a bit more than that, up to perhaps 75 per cent.

"At this time, we don’t see the US market as expensive, so we think it is justified to have more than the 57 per cent market weighting at this time.”

Charlie Morris, head of multi-asset at Atlantic House fund management says: “US equities are collectively worth $33 trillion compared to $82 trillion for global equities, making them the largest geographic allocation.

"US companies have been buying overseas businesses for decades, making the US stock market not only bigger, but also more international.

US equities are worth 155 per cent of US GDP, against the 15-year average of 118 per cent.

By contrast global equities (excluding US) make up the lesser 56 per cent of global GDP against a 53 per cent average. Both are above average, but the US is much more so.

You could read this as a US bubble.

The boom in tech explains some of this, as does financial engineering, which is commonplace in US corporate culture.

But another consideration is that the US dominates global commerce following decades of mergers and acquisitions.

We are where we are.

Valuations

On valuation grounds, we would expect the rest of the world to outperform the US over the next decade.

But that does not necessarily mean turning away, as a core is a long-term must have for a diversified investor.

The prudent choice would be to hold US equities as a core holding, but to own a little less than you might have done in the past.

The main US equity market index has hit a new record high twice in the past six months, mostly as a result of investors being increasingly confident that the interest rate cuts implemented by the US Federal Reserve, that country’s central bank, and increased optimism that the lingering trade dispute between the US and China will soon end. 

The record highs being achieved by the market are a concern to Alec Cutler, who runs the Orbis Global Balanced fund.

He said the “market as a whole is expensive” but believes there are individual stocks that are good investments, and added that, given the size of the US market, owning no US-listed shares is not very feasible.

The Orbis Global Balanced fund has about 33 per cent of its capital deployed in US shares, making it the largest geographical exposure in his fund.

Because he runs a multi-asset fund, Mr Cutler invests in assets other than equities, so the 57 per cent allocation of a pure equity tracker fund is not a relevant comparator.

James Thomson, who runs the £1.8bn Rathbones Global Opportunities fund, which has returned 44 per cent over the past three years, compared with 27 per cent for the average fund in the IA Global sector in the same time period, currently has 65 per cent of the capital of his fund invested in the US market.

He told FTAdviser that: “there is no doubt the US market looks expensive compared to the level at which it has traded historically.

"But I would argue that the types of companies listed on the US market over recent decades has also changed.

"I think there are more quality companies there now, businesses that are less cyclical, less reliant on the wider economy to make profits, and the improved quality of the companies on the US market means it is justified that it trades on a higher valuation than it has done historically.

"In terms of valuations compared to other equity markets, I would say that the reality is the US is where the growth is right now.

"Company earnings in the US have been hindered by tariffs and the trade dispute, but I expect that as those effects wear off, the earnings growth of US companies will pick up, and that will boost the share prices further.”

Allocations

Simon Evan-Cook, multi-asset portfolio manager at Premier Miton Asset Management, has been sceptical of the investment case for US equities for quite some time, once describing his investment policy as “America last", due to concerns about what he believes are expensive share prices.

He says: “It’s no big secret that we have generally had very low exposure to US equities over the last decade.

"So the good track record we’ve built up over that time has been in spite of our views on US equities, not because of them.

"But (like a stopped clock) we think we’ll be right to avoid the US eventually.

"In all of that time, our chief reason for avoiding US equities has been that they looked too expensive compared to other markets, and that remains the case today. 

"That said, we still think the US is worth looking to for diversification purposes, and some of our mandates do hold US equities for exactly that reason.

"But where we do, the strategies we use put us far from the madding crowd.

"In particular our value funds or small-cap mandates (or both), as these don’t hold the kind of middling ‘growth’ companies that have been bid up by price-insensitive index buying.”

Andrew Cole, multi-asset investor at Pictet, said US equities have been “the place to be” over the past decade, partly because the US economy has grown at a much faster pace than others, but he expects the rest of the world to Catch-up with the US in 2020, boosting the returns of those equity markets relative to the US.