Investment Outlook - Summer 2017 Edition

Why ignoring the US is such a challenge

Donald Trump’s policies, Federal Reserve Bank decisions, and the world’s biggest global brands; not a day goes by when we’re not reading or hearing something that originates from the US. But how much of what we hear and read about influences our investments directly?

First of all, and to give some context, we have explored how far their influence reaches in global markets and economics.

What does the US offer?

The US is the largest economy in the world, making up almost a quarter of global GDP, and is the driver of global growth (correct at the time of writing: July 2017).

The country also dominates global stock markets, with US companies making up 60% of the MSCI World index, which is a widely used measure of global developed markets. To put this in perspective, the second largest constituent, Japan, makes up less than 9% of the index. UK companies constitute roughly 7%.

The US stock market is the world’s largest and most liquid, accounting for more than a third of global stock market capitalisation and offering the most diverse array of companies. US stock exchanges the New York Stock Exchange (NYSE) and NASDAQ, are the two global leaders in terms of trading volumes.

Many of the world’s leading multinational corporations are US-based and investments in them thereby provide exposure to global economic growth. For example the largest constituents of the MSCI World index are instantly recognisable: Apple, Microsoft, Amazon, Facebook, Johnson & Johnson, Exxon Mobil, Alphabet (Google) and JP Morgan Chase.

The composition of the US market is particularly interesting for UK investors, since our own stock market is heavily concentrated in just three sectors: financial services, energy and materials. Among the largest sectors in the US market, by comparison, are technology, healthcare and consumer discretionary.

Outperforming the UK

Source: Bloomberg. Past performance is not a reliable indicator of future returns

You can see from the chart above that the US market has significantly outperformed the UK over the last 10 years.

In addition, the US is the most important export destination for one fifth of the world’s nations. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions. The world is following the US Federal Reserve (Fed), which has already raised the interest rate twice this year, as to whether it will ‘normalise’ monetary policy.

The US economy remains the most influential globally and most of the world’s equity markets are correlated to it. This means investors tend to follow what is happening in the US economy as well as in their domestic markets.

Therefore many investors consider the US should be an essential part of any globally diversified portfolio. 

Things to be aware of

Recently investors have become concerned about the US’s dominance and growing weight in global indices such as MSCI World, but they cannot agree on whether this is actually a positive or a negative, particularly with regard to the implications for passive investors. 

Global doesn't necessarily mean global

Investors who want broad-based exposure to global markets could, in reality, be getting a US-heavy portfolio by investing in the index or a fund that closely resembles it. This is not necessarily a problem, as long as investors are fully aware of the level of their US exposure.

The same applies to global equity funds. As you can see from the table below (which lists all of the global equity funds on our Recommended Funds list and their weighting to the US), a global fund such as Baillie Gifford International has 50% of its portfolio in US equities, which may be a higher allocation than an investor was anticipating. Veritas Global Equity Income, on the other hand, only has a 14% weighting to the US.

There is no right or wrong in terms of how much of a global portfolio is allocated to the US – it is entirely down to the fund manager’s judgement – but it is something for investors to be aware of.

Fund US weighting % View report
Baillie Gifford International B Acc 50.72  View Report
BNY Mellon Long-Term Global Eq Int W Acc 49.64  View Report
Artemis Global Income I Inc  33.41  View Report
IP Global Smaller Companies Y Acc  32.35  View Report
Veritas Global Equity Income GBP 13.93 View Report

 

US doesn't come cheap

Additionally, American companies aren’t cheap at present. On many measures, US stocks are among the most expensive in the world. This isn’t meant to infer that US stocks will fall off a cliff tomorrow, but rather that stocks in other parts of the world could offer more opportunities going forward. Stock valuations in Europe, Asia and emerging markets are currently considerably lower than their US counterparts.

Have we moved to the Trump Trade?

Investors are now assessing whether President Trump has signalled a regime shift and a move to a reflation theme, which some are calling the ‘Trump Trade’. Existing business models in the US in many cases are being disrupted by technological innovation, as we’ve seen with Amazon in retail, as well as shale oil and gas, and Uber. Trump’s victory in the election also highlighted voter discontent with injustices post the global financial crisis, which has resulted in rising populism and somewhat unconventional politicians and policies.

People may also grant a higher valuation to a country’s stockmarket because they perceive it to have attractive fundamentals. America may have better prospects for economic growth than the rest of the developed world, not least because of its favourable demographics. Its technology giants may be less vulnerable to competition than the Japanese multinationals of the late 1980s because they benefit from “network effects”, or natural monopolies. And profits may have shifted to a higher level in a world where trade unions are weak, the cost of capital is low and business is very mobile.

If you’re interested in adding some US shares to your portfolio, take a look at our specialist international trading page.

Additionally if you have a TDDI SIPP or Trading Account, we’ve explained how to make the most of international shares.

Our US-orientated Recommended Funds

Below is a list of funds from our Recommended Funds list that are predominantly focused on the US. Take a look.

HSBC American Index C Inc

JPM US Equity Income C Net Inc

Old Mutual North American Eq R GBP Acc

Schroder US Mid Cap Z Acc

Legg Mason CB US Agrsv Gr X GBP Acc

Legg Mason IF Royce US Smaller Companies

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Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.

You should also read the Key Investor Information Document (KIID) about the fund(s) you are considering. We will not inform you if the risk profile of the fund changes so you should regularly reassess your investments to ensure they continue to meet your attitude to risk and investment goals.

The value of international investments may be affected by currency fluctuations which might reduce their value in sterling. 

Foreign markets will involve different risks from the UK markets. In some cases the risks will be greater.

Important Information

The information we provide in this Investment Outlook is for information and discussion purposes only and not intended to be a personal recommendation to invest, which means we have not assessed your investing knowledge and experience, your financial situation or your investment objectives.

Investors should be aware that with self-select products or services the value of investments can fall as well as rise unlike cash investments. You may get back less than you invested. Past performance is not a reliable indicator of future performance. 

If you are unsure about the suitability of a particular investment you should speak to a suitably qualified financial adviser.