In focus

Is the time up for US equities leadership?


The last decade has belonged to the US, but history shows that the winners change over time, both within and across markets. Many of the tailwinds that have favoured the US equity market are fading or are under threat. Earnings growth differentials have flattened, profit margins have peaked, valuations look stretched and political pressure is mounting against the largest technology firms. Against this backdrop, investors would be unwise to have all their eggs in that one basket.

Since the Global Financial Crisis (GFC), the US equity market has outpaced the rest of the world by some distance. For example, over the past decade, US equities, as measured by the MSCI USA Index, achieved an annualised return of 13%. In contrast, global (ex US) equities, as measured by the MSCI All-Country World ex US $ Index, achieved an annualised return of only 6%1. Even in the wake of the Covid-19 outbreak, this trend has remained intact, leading some investors to question whether they should even bother owning any non-US equities at all.

It is important to remember, however, that this was not always the case. Although the US has been the best performer this decade, it was one of the weakest performers in the previous decade, as shown in Figure 1.

For example, during the 2000s, the bursting of the US tech bubble coincided with increased globalisation and the industrialisation of China. This paved the way for a boom in emerging market (EM) equities. Similarly, during the 1970s and 1980s, Japan’s asset market rally appeared unstoppable, as overconfidence reigned over the country’s seemingly infallible economic model. Nevertheless, optimism that these markets would continue to outstrip the rest of the world eventually subsided.

Investors often fall into this trap of extrapolating past performance into the future because they have trouble imagining a future that is different from the present. But if history is any guide, rampant outperformance does not last forever and US equities could soon suffer this same fate. In this paper, we examine what factors could sway performance in favour of global equities.

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1 Source: as per Figure 1. Dates from 31st December 2009 to 31st December 2019

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