As the US-led world order crumbles, and concerns grow about the attractiveness of the US itself as an investment destination, asset owners are sitting up and paying attention. With markets more concentrated than ever, it’s an environment where you have to be “constantly questioning,” according to Justin Pascoe, Cbus head of portfolio construction.
“This is a challenging time,” Pascoe told the Investment Magazine Fiduciary Investors Symposium in the NSW Blue Mountains.
“There’s so much noise. I try to remind myself that we’re all long-term investors, and with some of this noise we need to look through it.”
But if investors are thinking about moving away from the US, they also need to think about “where they’re going to move to”. The US still has the best corporate management teams on the planet, Pascoe said, which are heavily aligned with shareholders. It has the deepest capital markets in the world, the strongest military in the world, and provides the world’s reserve currency. Its soft power is unrivalled, and it’s independent in terms food and natural resources like oil and gas.
“These are long-term things that shouldn’t change just overnight,” Pascoe said.
“Probably the one thing that’s a weakness that Trump seems to be wanting to address is a genuine manufacturing capability in the US economy. [The US] consciously chose to outsource low-margin production to China and other places and focus on what was and still is, I think, their comparative advantage of high-margin intellectual property and leave the manufacturing of low-margin product to other countries that American consumers just buy too much of.”
Escala Partners is more cautious on the outlook. CIO Tracey McNaughton told the Fiduciary Investors Symposium that the high-net-worth wealth management firm had taken a tactical position away from the country following German Chancellor Frederick Merz’s move to loosen borrowing limits and the prospect of increases in fiscal spending throughout Europe in response to Trump’s growing scepticism of the NATO alliance.
That trade has “been a boomer”, McNaughton said; it’s up 13 per cent, and Escala has a time horizon of one year.
“[Post Trump’s election] the Bank of America fund manager survey had the highest overweight to US equities since 2013,” McNaughton said.
“Now we’re talking about the end of American exceptionalism because of Trump policies, and that same fund manager survey now has a 35 per cent underweight to US equities.
“So within that context I would agree that the US is no longer exceptional. It’s still a great place to invest but it’s not exceptional.”
Quoting historian Niall Ferguson, McNaughton said that one sign of the decline of a great power is when it starts to spend more on servicing its debt than its military.
“They’re spending a trillion dollars to service their debt and spending about $900 billion on their military,” McNaughton said.
“So I think I get a sense…that some of the momentum is starting to slow down. Even foreign investors are starting to question a bit more and wanting a bit more of a risk premium to invest into the US – bonds and currency in particular.”
But Chris Worthington, head of quant and risk at JANA Investment Advisers, said that it was still difficult to move away from the US market even if you come to the conclusion that US exceptionalism is “not what it once was”.
Worthington also questioned the idea of US exceptionalism generally, pointing out that while returns have been exceptional – about 6.4 per cent real versus 5 per cent over the last 120 years, according to data from researchers Elroy Dimson, Paul Marsh and Mike Staunton – they’re “basically within a standard deviation of the average” and that other countries’ equity markets have had higher equity returns over the same period – Australia and South Africa.
“Weirdly enough, we’re not up here talking about South African exceptionalism and putting 30 per cent of our portfolio there – but that’s the sweep of history.”
More recently, US returns have “massively outperformed the rest of the world”, driven largely by strong earnings and valuation growth for companies based there.
“And that’s probably the point you really want to pause on and ask whether US returns will continue to be sustained at a higher level – looking at their valuation story, high PE ratios mean two things, right?” Worthington said.
“They mean either you’re expecting to get lower returns going forward or they mean you expect very strong earnings growth.
“And it has been the latter, but historically that’s not typically been the case. The Dot Com Bubble is probably the example that’s freshest in people’s minds about a time where there was a story that we’re going to see a real technological shift and change. People were forecasting strong earnings growth. That clearly didn’t happen, and that was a bad time to buy equities.”
Greg Hall, senior portfolio manager at Australian Retirement Trust, said that while it’s been an “exceptional” five years for US equities – especially the Magnificent Seven – investors paid up for that earnings growth and the prospect of it continuing, and even with a stellar outlook for earnings they now look “a bit expensive”.
“Would we expect that to persist? I mean, more logically, I’m not a believer in a tech bust situation like the Dot Com Bubble, but I do wonder with some of the Mag Seven whether they resemble a Microsoft, an IBM, maybe a General Electric going backwards,” Hall said.
“That is, companies with a bit of a technological advantage at the time enjoyed large market share, but perhaps they’ve had their day in the sun, and there’s some sort of obsolescence that sees a retracement. So between all of that, perhaps it’s a convergence back to something more normal and more aligned with the rest of the developed markets.”
