Investors looking to place new money should consider markets outside the United States as it has become oversaturated, reducing the value of returns, an Australian boutique investment manager has observed.
Talaria co-chief investment officer Hugh Selby-Smith said an examination of where global equity returns come from showed the US alone accounted for 74 per cent, exceeding Japan at 5.4 per cent, the United Kingdom at 3.4 per cent and Canada at 3 per cent.
“So the question is: does my next dollar also go into the US? The reality is that $74 per $100 are already in the US,” Selby-Smith said in a recent online presentation to advisers.
“I know for a fact that everybody listening to this call would have exposure to the US market, but in aggregate there’s an over-indexation to that US market.
“So with an incremental dollar, are we suggesting that return is going to go to 80 or 85 per cent and is that going to come from people paying more money? Well, that just means they are going to get lower returns.
“An equity is a long stream of cash flows and the higher price you pay, all else being equal, the lower return you are going to get, so I have a strong conviction that a new dollar should not be allocated to things that are over-indexed to the US market.”
He added that if investors continued to look to the US market, they should be aware of the ongoing skew caused by a handful of stocks that have the potential to affect the price of cheaper or lesser-known equities.
“Here is an illustration about why you may not want to invest in the US with your incremental dollar. On 27 January, the S&P 500 was down more than 2 per cent and yet over 200 of the companies in that index went up,” he said.
“We know there is $74 per $100 in global equities in the US market and because of concentration, $40 is in the largest 10 stocks and this is the cautionary tale about why you need to take that extra dollar and diversify into something different.
“The out-turn is that 200 stocks were up on the day and you would have done absolutely fine if you were in the broad index, but if you were in that really concentrated area, you lost more than 2 per cent of your money.
“This is very indicative of what happened in the period of 2001 to 2002 when the market was down 38 per cent, but a lot of companies were up over that period in absolute terms.
“This is an example that concentration by region, but also within a region, leaves you exposed to basis-point risk.
“This is where a cohort of stocks that aren’t impacted by whatever drives the market down can perform absolutely fine because they’re cheap and under-owned, and you can profit when the indexes in aggregate are performing poorly.”
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