Has the outperformance of US equities reached a tipping point?
As we enter the seventh year of the US bull market, we have likely reached a tipping point where international equities will 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.
How dollar strength is increasing labour costs in the US compared with Japan
Source: National Statistics, Morgan Stanley, Schroders. February 2015
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.
2) The commodities dividend
The second factor we believe will contribute to the performance of non-US equities is the commodities dividend.
While convention has it that the US consumer will be the biggest beneficiary of lower oil prices, most of the major investable regions outside of the US (including Japan, the eurozone, China and India) also stand to benefit as they are all large commodity importers.
In fact, UBS estimates that a $10 decline in oil prices will boost European GDP growth by 0.2%, compared to a gain of 0.1% of GDP growth in the US.
Finally, international equity markets are far more attractively valued than their US counterparts, both in absolute terms and relative to history on a variety of measures. The opportunity then for further re-rating in international shares seems higher than for US equities at this point.
We believe that against this backdrop, equity market leadership is likely to shift away from the US. This is fertile ground for bottom-up stockpickers able to exploit a range of opportunities from the breadth of international or global markets.
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