For a variety of reasons, a significant allocation to the US market may be the most prudent course for equity investors at present, according to a host of allocators who spoke to FTAdviser.
Jim Caron, co-chief investment officer for the global balanced risk control team at Morgan Stanley Investment Management, says that in a world where inflation is likely to be persistently higher than the level to which many investors have become accustomed, “rigidities” in economies are likely to have a major impact on how different markets perform.
He says the US is the market with the fewest rigidities, which, in his view, means that it will outperform rival markets despite the valuations.
The rigidities Caron is referring to include the fact that: “In Europe, it’s harder to hire and fire employees. The energy market is different as it relies on imports, unlike in the US, and many parts of European economies are more heavily regulated.
“Inflation is going to be part of the landscape globally for some time to come. We are seeing reshoring of manufacturing and deglobalisation, both of those things are long-term inflationary trends, while the money supply has also expanded meaningfully,” he continues.
“In that climate, the hurdle rate [that is the percentage annual return a company needs to make in order to be an attractive investment] is higher, and those rigidities make it harder for companies in Europe to achieve those returns. It’s much harder to start a business in Europe, and they risk being left behind in areas such as artificial intelligence.
“When there are trade disputes impacting these areas — for example, between the US and China — the US has shown an ability to negotiate.”
In terms of the the types of stocks and sectors Caron believes can perform well in such a climate, he says companies in the telecoms sector are likely to be able to maintain pricing power, as are commodity companies and businesses in the financial services sector.
Growing pains?
John Bilton, head of global multi-asset strategies at JPMorgan Asset Management, agrees that the ability to maintain profit margins will be a key part of investment returns in the coming period.
His view is that nominal gross domestic product growth — that is, growth which includes inflation — will remain high, but the share of this growth that translates into net profit for companies will be lower than has been the case in the past, as costs will be higher and margins lower.
Bilton says the global economy is transitioning, not merely from low to high interest rates, but also to a period where fiscal spending will boost the outlook for the industrial parts of the global economy, and to newer energy sources and a transition to a period where the full impacts of emerging technology are felt.
