• Mondial Dubai LLC

The Big Fat US Equity Market

Updated: Jun 6

Asset manager “herd” – overweight OR underweight?

Asset manager “herd” –overweight OR underweight.

KEY TAKE-AWAYS:

  1. The US represents 42.64% of global stock market value. China is the closest challenger at 10.9% (+HK at 6.52%), India emerging above Germany in 8th place (2.52%) and Saudi Arabia 10th at 2.43%.

  2. Not all stock markets are accessible- the MSCI Index reflects size for investable equities skewing weight more to the US (65%- June 2020) with Japan 2nd, UK 3rd. But watch out as the MSCI are now into Chinese A shares.

  3. Herd: Question- Overweight/underweight position US Equities 2021?

  • VAM/Sanlam: Underweight (Diet): why sail an Abra with an overweight passenger prone to capsize? Would you rather seek a leaner Abra with the potential to motor past Uncle Sam?”

  • Momentum: Underweight (Diet): US equities currently 50% more expensive than other developed markets.

  • Russell: Tactically neutral (no change): Although portfolio managers are at the lower end of their allowable US range.

  • Quilter Cheviot: Overweight (Eat!): Despite the fears of others- QC take the view the US represents “quality” and more specifically post pandemic Tech quality.


The Big Fat US Equity Market.

Asset manager “herd” –overweight OR underweight.

  1. BACKGROUND: For inexperienced investors looking for experience.

  2. THE HERD VIEW: For experienced investors the question: Overweight/underweight position US Equities 2021?

1. BACKGROUND: For inexperienced investors looking for experience.

For Stephen Covey: “the most important thing is to keep the most important thing the most important thing”. Today’s important thing is: which decisions have the biggest impact on the performance of your medium term investment portfolio? Starting with the end- the Big Fat US equity market is simply impossible to ignore for those searching for growth.

Fashion dictates that we start at the beginning. Two important steps take us to the Fat Man. Step One comes from the studies of Prof Gary Brinson and others. Brinson’s bunch studied 90 plus US pension portfolios over the 1974 to 1983 period to look for “the most important thing” in determining differences between portfolio performances. The outcome was that 95.6% of the performance difference is down to investment strategy (i.e. asset allocation). Subjects like market timing and specific asset choice did not count as important. Importantly, this reckoning is based on results for periods over 5 years. Such research will not appeal to speculators and traders caught in the fiction that get-rich-quick decisions are easily found.

Step two is the fact that the go-to asset class for medium term growth remains the equity market. Whilst Capitalism exists the chances of corporate ownership (and the desire for capital growth and dividends) driving pension/retirement planning remains. So we get to the Fat Man dominating this asset class to such an extent that whatever weight you apply to US equities it will be an important decision in assessing your performance versus everybody else. The research departments of our herd managers (Momentum, Quilter Cheviot, Russell, VAM/Sanlam) provide their current views on how the Fat Man is being weighed- in Section 2.

HOW FAT IS THE FAT MAN?


“He” is big. Whether we look at the relative size of global stock markets where combining the NYSE and NASDAQ dwarfs all competitors, or whether we view the highly regarded MSCI All World capital market index . The latter reflects the world of easily accessible markets. Our cartoon portrays the US as a big fat man sitting on the MSCI abra crossing Dubai Creek. It is obvious that wherever he sits the boat will tilt.


For inexperienced investors- it leads to the importance of “weight” in portfolio selection. If we take an MSCI All Countries tracker, the fact that 65% is US equity based means that the US will always impact that fund. A movement on the Swiss market (5th biggest) of 100% has the same impact as a 4.9% move on the US market. Size matters.


Importantly, whilst asset managers connect their expectations of markets to national economies, it is important to note the wind of change. Taking the Swiss markets as an example- the Swiss giants Nestle and Novartis are domiciled in Switzerland and on SIX Swiss Exchange but they are listed as ADRs (American Depository Receipts) and can be purchased on US Markets. A 2017 report from Russell shows the FTSE earnings being over 70% from abroad (outside UK); Japan at 32% and the Russell 1000 (US stocks) at 37%.


These aspects of globalisation increase our understanding of markets. They are morphing away from being exact national economic barometers. For example, the owners of the Dubai Financial Markets includes NASDAQ reflecting a trend of markets to cross sell market services. After all, the markets are ultimately a place for buyers and sellers to trade assets and for firms to raise capital.


Having said that our asset managers remain convinced that the US economy is the biggest influence on the fate of US markets. So where are they in terms of assessing the ideal weight for the Fat Man in 2021 and the near term?

2. THE HERD VIEW: For experienced investors the question: Overweight/underweight position US Equities 2021?

For Phil Smeaton at VAM/Sanlam: UNDERWEIGHT.We are underweight US Equities due to concerns surrounding the debt monetisation being used to finance social welfare programs. The imminent surge in US inflation and loss of value in the dollar, means that dollar-based assets, whilst they might go up in nominal value, are not necessarily as attractive vs. the rest of the world. If the US gets, let’s say 5% inflation, but Europe and the UK get 2%, whilst inflation is seen as a global problem, the risks are slanted toward the US.” Continuing “ we ask ourselves why take the risk – using Mondial’s analogy, would you want to be sailing in an Abra with an overweight passenger at the back, making the boat unsteady and prone to capsize? Or would you rather seek a leaner, meaner Abra with the potential to motor past Uncle Sam?”

Taran Paik at Russell Investments: TACTICALLY NEUTRAL. reflects a marginally different track of thought:“ our house view is to be tactically neutral on US equities in 2021”. Understanding the Russell approach does need the understanding of their proprietary CVS ( Cycle, Value, and Sentiment) process which might be a factor in their stance which is “US equities are expensive from a long-term perspective” but continues “the cycle is very supportive for the tactical horizon. On balance, that leaves us tactically neutral, although portfolio managers are recommended to be a the lower end of their allowable range for US equities, as non-US equities have better value and are more exposed to the cyclical and value stocks that will benefit from the post-COVID recovery”. With the notable addition that “ The US market is overweight the Growth factor (tech, healthcare) and the rest of the world is overweight Value factor. This factor preference provides an underweight US bias” Plus, “our strategic asset allocation process is underweight US large cap equities as expensive valuation suggests lower long-term returns relative to other markets.”

Lorenzo La Posta at Momentum Asset Management: UNDERWEIGHT reflects a consistent theme on valuation “ We are underweight US equities, compared to the rest of developed markets, because of their higher valuation” With the numbers expressed as “ The US equity market is currently 50% more expensive than UK, European and Japanese markets: investors are willing to pay $23 for each dollar of this year’s earnings in the US, while only $14-17 elsewhere”. There is nuance of respect for the US market in concluding “ some of this gap could be justified by the US market having stronger growth and quality characteristics, as well as a higher allocation to technology, we still expect them to underperform other developed regions over a medium horizon, particularly in a reflationary scenario”.

Daniel Joliffe at Quilter Cheviot: OVERWEIGHT Of the four houses – QC are somewhat contrarian in viewing the US market as overweight. “The main reason for our overweight position is that, despite the recent volatility that has been sparked by fears of rising inflation and subsequently interest rates, the US equity market ….has a significant number of quality businesses”. Continuing “Quilter Cheviot still believe that owning quality technology stocks will continue to benefit our clients in the long-term. In the aftermath of the pandemic, technology has been further embedded into our lives due to the increasing significance that Microsoft Teams, Zoom and gaming companies have had in people’s lives.” They conclude by adding a bit of a futuristic – convinced that the US is the home for tech moving forward which will soon to be supported by ESG “US equity market also provides access to a wider-range of companies that are focusing significant attention on ESG-integration or have ESG themes at the forefront of their business.”


For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at

+971 56 2228 535

clientservices@mondialdubai.com

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