Unsustainable US premium
Jacob Mitchell, portfolio manager of the Antipodes Global Fund – UCITS, and CIO of Antipodes Partners
US equities have never been more expensive in the last 25 years, both in a relative and absolute sense. Overexposure to the US leaves investors vulnerable, particularly if the US job market does not fully normalise by the time stimulus expires in September. Excess household savings could remain unspent, and consumption could slow.
Critically, this would unfold against a backdrop of higher inflation – we do not see US core inflation peaking until the end of next year. The risk is the economy slows materially before the investment-led recovery gains traction. A significant slowdown in activity against a backdrop of higher inflation is a nightmare scenario for US equities given elevated starting valuations.
Today, the rest of the world is valued at a 40% discount to US equities – and this discount is as extreme as it has been in 25 years. But a new capex cycle evens out the playing field. Given the US is home to big cap tech, secular trends around software and the internet have disproportionately benefited US equities – whereas emerging investment cycles around decarbonisation and investment will benefit companies globally, not just in the US. This extraordinary premium for US equities is unlikely to be as sustainable as many believe.
Expect lower returns
Joakim Ahlberg, portfolio manager of Nordea’s North American Stars Equity strategy
The US stock market is capable of moving up further before this cycle is complete – with an end only likely when monetary policy tightens significantly, or a credit event occurs somewhere. With real yields still firmly in negative territory, this is a long way off. With that said, we expect returns to be lower going forward than what we have seen since the market bottomed in March last year, as overall valuations have moved up significantly.
The question for us right now is if we will continue to witness a deflationary market like the last ten years, or if we will enter a more inflationary regime. This has big implications for sector allocations. On sectors, we are currently seeing a tug of war between inflationary and deflationary forces, which will most likely create sector volatility until we have clearer guidance.
In the short term, the market has moved from very early recovery into late expansion, which implies quality companies should fare better in this phase of the cycle. That said, we are of the opinion it remains important to focus on the bottom-up, without taking large sector bets. This should be beneficial regardless of what regime the market follows.
