On this 4th of July, I thought I would share some insight on a topic that has generated a lot of chatter lately: The viability and appetite for investing in the United States. It’s a fascinating and important question, so let’s dive in.
No one would dispute that since the Global Financial Crisis, US investments have outperformed their global developed market counterparts by a wide margin (anywhere from 400 to 600 basis points annually depending on currency exposure, timeframe, etc.). The big question is whether or not this trend will persist and if it is worth remaining invested in the United States despite what you may be hearing in the news or during gatherings with friends and family. Without getting overly technical, let’s look at some broader ideas that will help provide context and possibly drive strategy.
It’s important to realize that US equity investments have not outperformed out of sheer randomness. Here are a few reasons that explain this outperformance:
1) The American consumer accounts for as much as 34% of global consumption despite generating 25% of global GDP and representing a mere 4.5% of the global population. This highly consumption based economy creates a resilient domestic market and provides a solid foundation for American companies to operate on. The US economy is also more dynamic now than it has ever been with services representing almost 70% of all consumption making it far less susceptible to traditional business cycles.
2) US companies are the biggest, most profitable and highly diversified companies ever to exist. A great example is Amazon: a world leader in e-commerce, cloud computing, advertising and streaming sitting on $95 billion in cash. It’s no wonder the stock along with many others like it attracts interest from all over the world.
3) US capital markets are the most trusted and most liquid in the world. This results in a constant flow of global capital pouring into US equity and bond markets. Institutional and state investors do not have to worry about finding a buyer for large quantities of US Treasuries, publicly listed stocks and even private investments. Until a viable alternative to the US dollar emerges (and nothing comes even close right now), it’s hard to see this trend reversing in a meaningful way.
4) The rest of the world simply lacks many of the attractive features of the US market. Most developed countries have terrible demographics and/or lag heavily in innovation and productivity and/or sit a border or two away from hostile, autocratic states. Even if the US has its challenges, in relative terms as an investment market it stands in a class of its own.
There is certainly an argument that all this can change. President Trump’s agenda clearly demonstrates that there are some aspects of the global macroeconomic and geopolitical status quo that no longer benefit the American population at large the way they did in the decades following World War Two. This has resulted in a very tumultuous start to his second term and is the primary reason why all this is even up for discussion. However, before we go any further, I would caution against blaming this on Donald Trump.
The following points are important considerations and are objectively bipartisan:
1) The United States no longer wants to be (or needs to be) responsible for the defence of the West. Since becoming a net energy exporter, there is very little vested interest in having American destroyers patrol shipping lanes and having ground forces scattered around the globe. It is costly and politically unpopular and this has already resulted in allied nations (especially in Europe) demonstrating increased responsibility and investment in their own defence.
2) The world cannot rely on the United States being the consumer of last resort forever. It has been far too easy for foreign producers to dump cheap products with weak currencies onto the American market creating the massive trade deficit that has fueled the tariff narrative. While it may not be in America’s best interest to produce sneakers and toaster ovens domestically, foreign exporters will have to be more cautious about which products get unhindered access to the biggest consumer base in the world.
3) Being the world’s reserve currency and banker can only be pushed so far. The surging dollar has helped usher in this last half century of American exceptionalism in many aspects, but it has also resulted in the gutting of the manufacturing base. The blue collar jobs that were emblematic of the 50s and 60s are simply not viable because American goods are rendered far too costly in large part because of such a strong dollar and higher labour costs versus other countries like India and China.
This is a complex and nuanced issue that requires being studied and reflected upon from multiple perspectives and considering many more factors than the ones I’ve outlined. As with all investment decisions, it comes down to managing risk and ensuring sufficient diversification so that you are not penalized for being wrong regardless of your views.
All that being said, I suppose I could sum up my position on US investments as the following: I would not place all my bets on them, but I certainly would not bet against them in any meaningful way.
Wishing you a wonderful start to the summer and I remain at your disposal at all times to discuss in more detail.
BY ROBERTO LAMORTE – Associé / Associate
■ Financial Security Advisor with 9447-0347 Quebec Inc.
■ Mutual Fund Representative with Investia Financial Services inc.
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