For a generation of investors, investing in the US market has been a winning experience:
- The US now accounts for 58% of the total world stock market capitalisation.
- From 1900 to 2021, the US market outperformed non-US markets by 2.1% annualised.
- For the last 12+ years, US equity has outperformed International equity.
This incredible outperformance has caused US investors to overweight US stocks in their portfolios. This continuous outperformance and the expectation of outperformance have caused some worrisome trends to emerge:
US equities are trading close to all-time highs versus the rest of world stocks
Source: Bank of America
Tech stocks contribute more to the S&P 500 than they did during the dot-com bubble.
Source: Bank of America
On the other hand, international markets are becoming more attractive with the expected premium for investing in emerging markets at its highest in the past 25 years.
Source: Bloomberg, Market Sentiment
Research and logic suggest that countries selling at lower valuations should have a higher expected return. As Howard Marks points out in his book, The Most Important Thing, “I think it’s essential to remember that just about everything is cyclical. There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.”
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.
