Get the latest Equities news delivered directly to your inbox with our free subscription.
Sign up to receive the myFT Daily Digest email, a roundup of the latest Equities news every morning.
The author previously served as the chief investment officer at Bridgewater Associates.
Can US equities continue their streak of outperforming their peers for another decade after achieving this feat in 12 out of the last 13 years?
At first glance, it may seem unlikely that the US could remain on top for another 10 years. Historical data shows that equity performance varies between US and non-US markets. Eventually, high valuations, margins, and ownership lead to a change in leadership, particularly when a new growth catalyst emerges. The bursting of the US technology bubble in the early 2000s and the subsequent growth of China after joining the World Trade Organization illustrate this dynamic: US equity leadership in the 1990s gave way to more China-focused markets in the 2000s.
However, upon closer examination, there are two reasons why US equity exceptionalism could continue. First, the US is poised to benefit from significant productivity gains driven by technologies like artificial intelligence. Second, a global economy that is slowing down may work against cyclically-biased equity markets in other countries, favoring those with organic growth drivers. While diversification remains important in finance, given the economic prospects in the coming years, investing heavily in US stocks could yield better results.
This is not to dismiss the importance of diversification across asset classes and geographical regions. Investors who aim to increase long-term wealth through compounding returns must manage the risks associated with specific events. It is also not to suggest that the US won’t occasionally lag behind other markets in the short term. For example, the US underperformed at the beginning of this year when China reopened and Europe’s economic damage was less severe than anticipated. However, over the next decade, Markowitz’s principle of diversification might face some geographical challenges.
Research shows that domestic economic performance primarily drives local equity returns over multi-year periods. A 2011 study by Clifford Asness, Roni Israelov, and John Liew found that 39% of 15-year returns could be attributed to domestic economic factors. Growth is primarily influenced by labor and productivity. Considering that most developed countries and China face similar labor constraints, the US is likely to emerge as a growth leader due to its potential for greater productivity gains.
You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.
Specifically, the gradual adoption of technological advancements, particularly AI, could significantly boost US growth. A recent report by Goldman Sachs estimates that widespread use of generative AI could increase US labor productivity growth by 1.5 percentage points per year, effectively doubling the current pace. This would have a comparable impact to the introduction of personal computers. The report suggests that this could potentially raise US GDP growth by 1.1 percentage points over a 10-year period.
The dominance of US tech companies could also benefit US equities in the next decade due to their significant weightings in US equity benchmarks. Factors such as high government debt, unfavorable demographic trends, and fragmented economies may contribute to slower global economic growth. The IMF’s World Economic Outlook in April highlighted a decline in the five-year-ahead forecast for global GDP growth, from 4.6% in 2011 to only 3%. In such a scenario, companies with sustainable, non-cyclical sources of growth are likely to attract investors. Non-US equity benchmarks tend to have higher exposure to industrials and basic materials, while the US has a much larger technology sector.
This does not rule out the possibility of a short-term pullback in US mega-cap tech stocks or relatively stronger equity performance in other countries or regions. However, when examining long-term portfolios and the shifting dynamics of equity leadership in recent decades, it becomes clear that growth and its driving forces play a crucial role. Currently, it is challenging to imagine a macroeconomic environment similar to that of Japan in the 1980s or China and emerging markets in the 2000s.
A relatively stronger US economy, driven by its comparative advantage in key technologies and growth fueled by structural factors rather than cyclicality, suggests that US equities are more likely to remain at the forefront in the coming decade.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
