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January 2025
A few examples of the current ‘American exceptionalism’ narrative in 2024 include:
As a result of the above, the US is now effectively the global index and valuations are likely to condemn global equity indices to mediocre long-term returns.
The US has 4% of the world’s population, 25% of global GDP, and 33% of global profits. However, given the excessive valuations of US companies, it now accounts for 73% of the MSCI World Index.
Source: Gresham House Ireland Investment Management
The only similar period of dominance in recent history is Japan’s superior position in consumer technologies in the 1980s. The country made up 15% of world stock market capitalisation in 1980, and by 1989 it represented 45% of the global equity markets. At the time, Japanese share prices increased three times faster than corporate earnings, echoes of which are currently being seen in US markets.
After reaching nearly 39,000 in December 1989, the Nikkei lost over 80% of its value over the next eighteen years.
Source: Gresham House Ireland Investment Management, Bloomberg
While the valuations in the US today are not as extreme as we saw in Japan in the 1980s, they are still at levels where future returns have been weak. In our view, mega cap US equities are over valued, over owned and over hyped which we believe increases the risk.
The US market has some of the best companies in the world, however paying a sky-high multiple for those companies compared to the rest of the world matters more than their inherent quality. It is difficult to time the end of the bubble, but one thing we do know is that all bubbles end and this one will be no different.
When the Dotcom bubble burst, value investing delivered strong positive returns:
Source: Gresham House Ireland Investment Management
Conclusion
We have always taken the big risks off the table, for example:
We are finding plenty of pockets of value outside the US mega cap space, in particular we believe the UK and continental Europe hold attractive opportunities and therefore this is where we are focusing our research efforts.
Looking foolish in the short term is the price to be paid to in order to protect capital and not take valuation risk. We remain comfortable that over the full cycle our funds will deliver superior returns compared to the broad indices while taking on significantly lower levels of risk.
Any views and opinions are those of the Fund Managers, this is not a personal recommendation and does not take into account whether any financial instrument referenced is suitable for any particular investor.
Capital at risk. If you invest in any Gresham House funds, you may lose some or all of the money you invest. The value of your investment may go down as well as up. This investment may be affected by changes in currency exchange rates. Past performance is not necessarily a guide to future performance.
The above disclaimer and limitations of liability are applicable to the fullest extent permitted by law, whether in Contract, Statute, Tort (including without limitation, negligence) or otherwise.