The equity leadership transition
As we enter the seventh year of the US bull market, we have likely reached a tipping point where international equities could begin to generate superior returns to US equities.
The link to the full analysis can be found at the bottom of this page, but in summary, there are a number of factors that make a powerful case for non-US equities.
Firstly, the outperformance of US equities in recent years has in no small part been a reflection of a competitive and flexible US economy when compared to the more rigid labour laws of other countries, especially Europe. However, this may all be about to change as a combination of wage restraint in Japan and Europe, and the recent strengthening of the US dollar, has had a dramatic effect on relative labour costs and served to improve the competitiveness of these two major regions.
We are already seeing the evidence of this change in competitiveness reflected in economies’ and corporates’ growth rates. Cost competitiveness is helping companies to grow market share (sometimes at the expense of US competitors) and exports are accelerating in both Europe and Japan. Meanwhile, the stronger dollar is beginning to inflict some pain on corporate America and this is only set to worsen as a significant part of the currency appreciation has been very recent.
Figure 1: Average hourly wages – US and Japan (in US dollars)