The US stock market's reign of exceptional returns might be coming to an end, and it's a hot topic among investors. In this episode of the On the Money podcast, Kyle Caldwell and Richard Saldanha, manager of the Aviva Investors Global Equity Income fund, delve into the future of US exceptionalism and explore whether investors should broaden their horizons.
The Rise of US Exceptionalism:
For the past 15 years, the US stock market has been a powerhouse, delivering remarkable returns. This success has led to the country's increased influence on the global stock market, with the US now making up a significant portion of it. But is this era of dominance coming to an end?
Factors Challenging US Exceptionalism:
Kyle and Richard discuss several factors that could contribute to a shift in the market's dynamics. High valuations, a concentrated market, and geopolitical tensions are all potential contributors to a changing landscape. But is this the end of US exceptionalism, or just a temporary setback?
The Global Perspective:
Richard highlights the importance of considering other regions and areas for investment. With the US making up a significant portion of global indices, it's crucial for investors to diversify. The US market's performance in 2024, for instance, was dominated by a select group of companies, but other regions like Europe, Asia, and emerging markets outperformed in dollar terms.
The Valuation Debate:
The conversation turns to valuations, with Kyle questioning whether the US market is pricey as a whole or if it's just the top-performing stocks driving up the average. Richard explains that while the US market may look stretched compared to other regions, there are still plenty of attractive companies paying and growing dividends. However, he suggests that looking outside the US makes sense due to more attractive valuations and the ability to participate in the same driving dynamics, such as AI and energy efficiency.
The Magnificent Seven:
The discussion focuses on the so-called Magnificent Seven stocks, which have been a significant driver of US market returns. Richard reveals that his fund owns three of these companies: Microsoft, Alphabet, and NVIDIA. He explains that while these companies have been exceptional, they are not the only attractive investment opportunities. The fund also looks for companies with consistent dividend growth and healthy cash flows, regardless of their location.
The Role of Political Risk:
Kyle brings up the impact of political risk, citing the US tariff policy as an example. Richard acknowledges that geopolitics has been a significant factor, but companies have shown resilience. He also points out that political noise can create investment opportunities, as seen in the healthcare sector. However, investors need to have a long-term perspective and a thick skin to navigate the volatility caused by short-term political events.
Global Income Opportunities:
Richard shares that the fund has a global remit, with around 45% invested in the US. He highlights the attractiveness of dividend-paying companies in Europe and the potential of Asia and emerging markets. The fund focuses on companies with consistent dividend growth and healthy cash flows, regardless of their location. Richard emphasizes the importance of considering a company's ability to sustain dividends and invest in its business for long-term growth.
The Bottom Line:
The episode concludes with a thought-provoking question: Is the era of US exceptionalism truly over, or is it just evolving? As investors, should we be casting our nets wider to capture global opportunities, or is the US market still the best bet for strong returns? Share your thoughts and join the conversation in the comments below!
