MIKE DOLAN: US stocks beckon amid global gloom

The list of risks to your money in some of the world’s biggest economies has spiralled amid a withering array of gloomy scenarios, many not contemplated for more than 30 years.

And so it’s fast becoming a world where relative valuations may matter less than a purring home economy, steady income and deep and liquid markets — relatively free from opaque political sideswipes, international sanctions or unmanageable exchange-rate risk.

Mirroring so-called deglobalisation trends of reshoring, secure energy and a host of repatriated industrial capacities from chip making to autos, “home bias” in investing may be back too.

And for the US, that’s an awful lot of money to be tempted back home to what’s already the biggest and most easily traded market for stocks in the world — with both cash and long-term bond holdings now yielding more than 5% to boot.

Based on IMF data on comparative international investment positions through the early part of this year, US portfolio investment overseas — equity, fund shares and debt securities — stood at more than $14.5-trillion.

While that’s still more than a trillion dollars higher than pre-pandemic levels in 2019, it’s retreated by almost $2-trillion from the peaks of 2021, just before the Russian invasion of Ukraine in February last year.

A more granular look at US long-term investors’ purchases of overseas equities by ICI shows funds have been sellers of global equities since May 2022 on a rolling six-month basis.

While the scale of those sales has lessened since February this year, a reluctance to return outright seems clear as geopolitics deteriorates, the US economy dodges recession and re-accelerates, and a buoyant dollar both feeds and feeds off US investors’ temptation to stay home.

But it’s not just that scared US money is going home.

Shrinking universe

For Swiss asset manager Julius Baer’s chief investment officer, Yves Bonzon, the pool of investable markets outside the US is simply getting smaller due to seismic and structural shifts in global relations.

“The investment universe for western capital has shrunk with the Ukraine invasion and return of cross-border political risk in a multipolar world,” said Bonzon. “The only option to deploy capital in size is the US.”

“If you reduce your playground to democracies, money will flow to the US — not the UK, or Switzerland or Germany — and you can see the outperformance of US assets is evidence of this,” he added.

What’s more, Bonzon believes inflation is likely to settle as close to 3% as to 2% once the world’s central banks are finished their severe tightening cycle, meaning the secular bull market in bonds is over even if more attractive income allows them to be a good portfolio hedge again.

That overview is a world where investors should favour real assets over nominal claims and focus on “store of value” equity markets, he thinks. And the latter means Wall Street big caps and the S&P 500 continue to be the strategic market of choice — underscored by their proven cash returning properties and aggregate insulation from higher interest rates this year.

If other overseas asset managers or sovereign wealth funds were to think likewise, then the some $25-trillion of foreign holdings of US portfolio assets — some $10-trillion higher than US asset holdings overseas — may only get bigger.

But there are questions and problems as always.

The upshot could be an ever wider US deficit on its net international investment position — potentially lifting the dollar as that inflates, but leaving it vulnerable to the yawning gap and foreign investor sentiment down the road.

And while international politics looks fractious right now, the next 12 months will once again test the resilience of the US democratic system and may challenge attractiveness of US assets in the process.

Even the haven of home seems far from straightforward.

Reuters