American exceptionalism, a notion that investors have largely accepted for the past 150-200 years, is under threat, as the US administration moves to make drastic changes on matters including immigration, tariffs, climate change and the deregulation of financial markets.
These proposed changes have the potential to disturb the proven formula for exceptionalism but the new geography of investing, a term coined by Capital Group to describe the approach of evaluating companies based on where they do business rather than where they are domiciled, creates opportunities for asset owners to tap into the US market, at potentially lower valuations, via companies based outside the US.
According to Andy Budden, investment director, Capital Group, there are still attractive opportunities in the US market, with the foundational pillars underpinning the strength of the US economy firmly intact.
“The first foundation is absolutely productivity growth, which is based on this huge domestic market, and the US continuing to be a global hub of innovation,” he said, citing developments in technology and healthcare as examples.
“But it’s not just about productivity growth, which has accounted for two thirds of economic growth since the Second World War, it’s also that the US offers a very attractive proposition for shareholders, underpinned by supportive government policy. It is partly because the financial incentives are very high that [the US] attracts the best talent.”
“Companies are also really good at carefully managing their share count so they don’t dilute shareholders, and the regulators are quite pro-growth, especially compared to regulators in, for example, Europe.”
This formula for exceptionalism has underpinned the strength of US economy for hundreds of years, and remains intact, according to Budden.
However, American exceptionalism comes at a price. US equity market valuations are relatively high compared to most other equity markets, though this has in a large part been driven by certain sectors such as technology, which has been at the center of the sharp rise in market concentration in recent years.
For discerning long-term stock pickers, Budden said the US still represented interesting opportunities but not because of the Trump administration’s strategy to bring opportunities home.
“There’s certainly a case for [investing in] domestically oriented companies but reshoring is something that will take quite a long time so it’s also very important to evaluate companies based on where they do business rather than where they are listed,” he said, citing Capital Group’s concept of the new geography of investing.
Based on Capital Group’s philosophy, where a company is domiciled and receives its mail is increasingly meaningless.
What’s more important in terms of understanding a company and constructing an investment portfolio and assessing risk is understanding how it does business, including where it derives its revenue.
“Most of the best companies are large multi-nationals that do business around the world,” Budden said.
“For a stock picker, that’s a really good opportunity to identify, for example, a great US or Chinese business that’s growing quickly but is listed in Europe and may be potentially benefiting from a lower valuation.”
Despite plenty of discussion, particularly in more recent times, about deglobalisation and countries becoming more insular and self-reliant due to political forces, Budden said the new geography of investing had enduring relevance.
In the US, S&P 500 companies generate 40 per cent of their revenue offshore, according to Capital Group. In Europe, it’s closer to 60 per cent. In Japan, the split is more or less even.
Europe opportunities
For investors looking to capture opportunities in Europe, Budden said investors had cause for optimism, notwithstanding significant challenges in the region.
“Europe is quite disconcerting at the moment for obvious reasons. Geopolitics in the region is a swirl and there are other fairly obvious challenges including a pretty poor track record of productivity growth and a shrinking population,” Budden said.
While these conditions generally don’t bode well for investors, Capital’s view through the lens of the new geography of investing means companies domiciled in Europe could still outperform.
“There are great global businesses inside a ‘European wrapper’ and also remember that countries need to defend themselves so defence spending around the world, including Europe, will increase,” Budden said.
“Europe also needs to fuel itself and it’s likely that it needs to reindustrialise itself as well, so that has the potential to drive an investment super cycle. Europe actually has a really big industrial sector so a lot of these companies could really benefit from these powerful secular trends.”
Asia
As the world’s second largest economy, China is a major global influence, however, China is grappling with a myriad of challenges, particularly a slowdown in economic growth.
Furthermore, China stands to be significantly impacted by the potential for higher tariffs on Chinese imports being touted by the US administration.
For investors, ongoing volatility in the Chinese and Hong Kong markets is expected, Budden said, although it’s not all bad news.
While economic growth is expected to slow amidst headwinds including demographic changes, a housing market downturn and high debt levels, there are attractive opportunities, particularly in technology, and companies that cater to the increasingly sophisticated needs of the Chinese consumer, he said.
“We are absolutely going to see a lot of news flow on geopolitics and tariffs, which is going to take the wind out of the sails of China and Hong Kong, so investors need to be ready for that and stay focused on the long-term,” he said.
Technology, travel and healthcare
Countries and regions aside, Budden cited longer term secular trends and opportunities in a number of sectors, including technology, travel and healthcare.
He likened the rise of AI to the rise of the internet in the early 1990s.
“It is interesting to draw parallels between what we’re experiencing today with AI and what we experienced in the early days of the internet. In those early days, it was all about the on-ramp to the internet and today it’s all about the on-ramp to AI,” Budden said.
“AI requires vast amounts of processing power and we know what that has meant for semi-conductor companies in recent years and, more than likely, going forward.”
“We’re particularly interested in companies that will be first to use AI to improve existing products and services, so really extracting greater productivity from existing products. This is a really important opportunity for investors.”
In other areas, Budden observed a global trend to pursue experiences and not just accumulate more stuff, which has fuelled growth in the travel sector.
“The world is going through a transition. People used to spend most of their money on goods and material possessions but increasingly that money is being spent on experiences and that’s quite an exciting area for investors,” he said.
Published in partnership with Capital Group.
