Produced in partnership with Blue Owl Capital

Global investing is a question of relative value. For most of our investment careers, US assets have been the clear leader relative to other markets, offering attractive opportunities for growth, stable income and diversification.

As an investment theme, US exceptionalism has been extremely durable, driven by a combination of US innovation and resilience. From the Global Financial Crisis to COVID-19, investors who bet against the US have been proven wrong in the long-term.

For many Australian investors, 2025 has raised new questions about whether US outperformance can continue in an environment of political change. Market volatility in April was particularly concerning as US equities, bonds and the dollar all sold off sharply, breaking with traditional correlation norms. In a world where these long-held correlations are not behaving as they have traditionally, many are asking whether this is a short-term change, or a long-term regime shift?

We aren’t macroeconomists or political scientists. But as investors considering the relative value of assets around the world, we think two guiding principles offer the best potential outcome and protection in a portfolio. The first is Warren Buffet’s “never bet against America” rule. And the second is: when in doubt, diversify.

Never bet against America

In his 2020 annual shareholder letter, Warren Buffet famously noted the resilience

and potential of the US. We think his conclusion is worth quoting in full “There has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking.

“Beyond that, we retain our constitutional aspiration of becoming ‘a more perfect union.’ Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so.

“Our unwavering conclusion: Never bet against America.”

At least until recently, we think most global investors would have agreed. An unhedged US dollar allocation has historically offered global investors an attractive mix of growth, income and diversification. In growth environments, equities provided capital gains and the dollar tended to appreciate, helping to offset declining bond values.

But the dollar also tended to appreciate during periods of equity market stress, as US bonds provided an international safe haven. April’s price action defied these historical norms. With US equities, bonds and the dollar all selling off in tandem, unhedged US dollar exposure amplified losses instead of providing the expected buffer.

Thus, the market volatility in April called into question long-standing expectations about correlations and diversification benefits in a US allocation.

Dynamism and innovation

Do the April market moves matter for the long term? Over the long-term investment horizon of institutional investors, we think economic dynamism and innovation are the fundamental drivers of asset performance, and few countries can match the US on those fronts.

Put simply, the US spends more on innovation, US companies adopt and commercialise innovations more quickly and labour adjusts more rapidly to changes compared to other developed economies.

As one example, US Federal Reserve economists estimate that sectoral reallocation of workers in the U.S. was more than three times that of the euro area during the COVID recession. As a result, US productivity growth has persistently outpaced the rest of the world, leading to higher growth potential relative to other countries, including Australia, where productivity growth has been notably sluggish.

Finally, no country offers the same depth and breadth of capital markets as the US. Indeed, the breadth of US markets offers opportunities to diversify within a market-weight US allocation. We think this is a compelling option in an environment where the outlook is clouded by politics and valuations appear stretched in US public markets.

When in doubt, diversify

While we believe the US is likely to continue offering attractive opportunities relative to other global markets, the risks have increased, and not due to politics alone.

Political pressure has raised questions about the independence of the Federal Reserve and other US institutions that many global investors view as key pillars of the case for holding US assets.

The actual extent and practical implications of these potential changes is virtually impossible to predict, which argues for higher risk premiums, as we have seen in the steepening in the US yield curve and continued weakness in the US dollar.

However, US public equity valuations remain near record highs, driven in part by the high concentration of a small number of leading companies (the “Magnificent Seven”). Meanwhile, public credit market spreads are near historic lows.

How can investors cope with a combination of increased uncertainty and elevated valuations? We think the answer, as usual, is diversification. Fortunately, the ability to diversify away from traditional stocks and bonds is plentiful within the US. Investors can get access to the dynamism and innovation of the US market, whilst also being able to diversify.

A market transformed

Private credit is one area that offers the potential for attractive diversification. In the US, private credit markets can provide exposure to large US corporates with less risk of short-term, mark-to-market volatility. As private credit markets have matured, private equity sponsors have adopted direct lending as a solution for financing large acquisitions.

As a result, private credit has transformed from a market primarily used by smaller, higher-risk, middle-market companies to one used by large, stable companies backed by sophisticated private equity investors with significant skin in the game.

Private credit lending is also typically done on a hold-to-maturity basis, reducing the risk of mark-to-market volatility that can occur in smaller, public credit markets such as high yield and bank loans during periods of market stress.

Asset-backed lending is another area where we see diversification opportunities. Bond and equity portfolios give exposure to government risk, as well corporate risk. Adding asset backed financing allows investors to diversify away from these traditional underlying exposures.

In today’s increasingly uncertain environment, broadening investment exposure beyond traditional bonds and equities is becoming not just prudent but essential. With innovation and productivity playing a growing role in shaping global economies, Australian investors may benefit from rethinking their US allocations but not necessarily betting against the US.

This could mean reducing reliance on growth-heavy or potentially overvalued assets, and instead embracing opportunities that offer steady, income-driven returns –particularly those tied to the vibrant US corporate and consumer landscape. I’ll be exploring these themes in greater depth in the upcoming parts of this series.

Alicia Gregory is a managing director of Blue Owl Capital and a member of the institutional capital team, based in Sydney. She is a former deputy chief investment officer of Future Fund. 

Gregory will deliver a keynote address to the Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria on October 21 to 23.