If the US stock market was in a 4×100 relay race it would be on its last leg, according to Russell Hogan, managing partner with the Edinburgh-based Dundas Global Investors.
Hogan told the 150 plus delegates at the Heathcote Investment Partners ‘Meet the Managers’ roadshow in Auckland last week that after sprinting ahead since 2009 the US was poised to pass on the growth baton to other markets.
“Since 2009 the US has been responsible for 77 per cent of the return on global equities,” he said.
Over that period he said the US share market returned about 12 per cent annually compared to just 3.75 per cent for the MSCI EAFE index, which measures the performance of 21 developed country stock markets outside North America.
“Over the long term the returns of the US and the EAFE have been 9 per cent and 8.6 per cent [respectively],” Hogan said. “Although I’m not saying they are going to converge.”
He said the components of return across the US and EAFE markets revealed some significant behavioural differences between the two.
Of the 12.1 per cent return in the US market: dividends contributed 2.5 per cent; book value growth added 2.5 per cent; buybacks piled on a further 3 per cent; and, valuation 4.1 per cent. By contrast, the respective EAFE statistics were 3.3 per cent, 0.3 per cent, 0.9 per cent, and -0.8 per cent.
“From 2009 to 2016 in the rest of the world it has pretty much been dividend yield fueling return,” Hogan said. The US dollar strength over the period also dragged other global markets down by about 3 per cent, he said.
After such a long period of relative outperformance, on current metrics the US stock market was more expensive than the rest of the world in nine out of 11 sectors, representing 92 per cent of global market capitalisation, he said.
Hogan said comparison on corporate ‘return on equity’ (ROE) across the US and EAFE also showed a marked disparity: according to the Dundas analysis, ROE figures indicated an implied growth rate in the US of 7.2 per cent and 2.8 per cent in the rest of the world.
Dundas also noted the long-running globalisation trend could be going into reverse with implications for investment decision-making, he said.
Hogan said as well as the widespread political backlash against globalisation – epitomised by the Trump administration – economic factors were forcing many firms to re-evaluate the strategy.
Citing research from The Economist publication, Hogan said ROE from firms operating in local jurisdictions exceeded global corporation in only one sector – IT.
“Big companies are looking at the numbers and paring back their investments overseas,” he said. “We hear that directly from businesses too.”
Overall, Hogan said Dundas, which manages over US$1 billion in a global equities portfolio of about 65 stocks, was tilting towards non-globalised firms promising dividend growth – and outside the US
“As the US runs the last 100, we need to look to other markets to find growth,” he said.