Markets were relatively sedate last week, with the MSCI All Country World Index of global equities up +0.2% in GBP terms, while fixed-income markets across the globe were broadly down as interest rates rose. One notable movement was a continued strengthening of the U.S Dollar against Sterling and a range of global currencies. This continues a multi-year trend of what has been referred to as “U.S exceptionalism” in markets and economics.
The performance of the American economy since the Global Financial Crisis has strongly outperformed global peers, particularly when compared to the UK. This outperformance is stark when contrasting the two countries on metrics such as GDP (a proxy for economic activity) on a per capita basis or looking at productivity per worker; where the UK has become a severe laggard among comparable nations, likely due to our overly restrictive planning system. The U.S Dollar has also strengthened its position as the global reserve currency over recent years, and last week the Dollar’s value vs a basket of trading partners touched all-time highs in the wake of the election of Donald Trump.
American exceptionalism has also been clearly borne out in the U.S equity market, which has delivered remarkable returns over the past 15 years driven by globally dominant tech companies delivering consistently robust earnings growth. In contrast, the UK market has languished. Returns have been relatively weak over the last 15 years and the market lacks robustly growing technology companies, likely because British companies spend exceptionally little on Research & Development relative to global peers. Many companies have been moving their stock market listing from London to New York and Bloomberg reported last week that markets such as Oman and Malaysia have raised more money than the UK in initial public offerings (IPOs) of new listings in 2024.
Trees do not grow to heaven, however, and on many metrics the U.S equity market is close to the most expensive it has ever been. For example, if we look at the widely followed cyclically adjusted price-to-earnings ratio the U.S market is trading on a multiple of 38.5x. The market has rarely been as expensive using data going back to 1871, and over that period the average value is 17.2x and the median value is 16.0x. It is sobering to think that the U.S market could fall by 50% and still be only trading at its long-term average valuation! By contrast, the UK market remains quite cheap.
While we continue to retain exposure to both the U.S and UK markets, we think that the most effective remedy to the challenges listed above is to also have healthy allocations to additional markets such as Japan and a wide variety of Global Emerging Markets. Here we see a healthy level of IPO activity, ongoing corporate governance reforms and very attractive valuations. Truly global diversification of our asset allocation will remain a core focus of our approach over the coming 15 years and beyond.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th December 2024.
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