Quality comes at a price
Investors have a special relationship with the United States. It is by far the largest, most diverse, and most liquid equity and bond market in the world, and its dynamic venture capital market attracts the brightest and best. Over the last few weeks though, some of the shine has come off the US exceptionalism story, as uncertainty around the administration’s policy agenda has begun to grow.
As the chart below from Empirical Research shows, this comes at a time when US equity markets look historically expensive, while other equity markets look historically cheap:
Perhaps, then, it isn’t too surprising that investors have looked to lower-value markets as uncertainty has increased. Yet, while free cash flow yield is useful in that it helps solve for different accounting practices in different countries, the one thing it does not do is account for future growth.
There is a strong argument to be made, therefore, that the US equity market is more highly valued because it is home to many of the world’s best companies with the greatest growth prospects. They have built and sustained a competitive advantage over the rest of the world in areas like AI and are likely to be strongly supported by the US government in maintaining that edge. They also attract leading businesses from a wide range of sectors. For every company like ARM Technologies, a cutting-edge technology firm, there is a company like Ferguson, a plumbing equipment supplier that moved its listing from London to New York.
President Trump’s ‘America First’ policies have increased uncertainty but investing has a way of rewarding you for accepting that uncertainty. Looking past the short-term noise, we believe that those policies are likely to be a net positive for the US economy, although we do see the benefits of that growth broadening out across the economy and, as a result, across the US market.
Callanish Capital investors are diversified globally but also within the US market itself. Holdings like Findlay Park American and Pacific North American Opportunities are increasingly finding opportunities in small and mid-cap companies and should perform well as markets start to broaden out.
This year has been a choppy ride so far, with trade wars and actual wars fighting for headlines. Investors have been drawn to other markets by what appear to be low and appealing valuations. But despite the uncertainty, the US economic outperformance of the last few years looks set to continue, and we are taking the recent weakness as an opportunity to own more of the world’s best companies rather than less.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
This document contains general information only and does not provide any advice or guidance specific to your personal circumstances.
Callanish Capital is authorised and regulated by the Financial Conduct Authority to manage investments but does not provide Financial Planning or Investment Advice. Please refer any such queries to your Financial Advisor.
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Callanish Capital Ltd is a Discretionary Fund Manager, directly authorised and regulated by the Financial Conduct Authority (“FCA”) under registration number 955992.