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ASR in the FT: What if the relative decline of US stocks isn’t temporary?

Beth McCann

5th MAY 2023

In conversation with the FT’s Jennifer Hughes, Ian Harnett noted that “US equities currently make up just under half of global stock market capitalisation, up from about a third in 2010. That’s lower than during boom periods such as the dotcom bubble — but that is hardly much comfort…”

“ …Yet US valuations remain punchy… the cyclically adjusted, price-to-earnings ratio … often cited by longer-term focused investors as a key metric (indicates) the S&P 500 index is just under 29x versus a long-run average nearer 17x. Small wonder that US fund managers, usually very domestically focused, have been looking to build their presence overseas…”

“The higher the valuations already, the harder to squeeze out more returns. The long-run relationship between the Cape and performance implies annualised total returns of a meagre 3 to 5 per cent over the next decade, reckons Ian Harnett, co-founder and chief investment strategist at Absolute Strategy Research.”

Factoring in likely dividend income, numbers that weak more or less imply the index won’t be going anywhere. Harnett points out there have been several periods where it’s taken a decade — or more — for real returns to turn positive. “It’s not what people want to hear, but it shouldn’t be a surprise from these elevated valuations,” Ian says.

“For example, Harnett points out it took 11 years for investors that bought US stocks in December 1974 to see their returns, adjusted by inflation, to turn positive and 13 years for those who backed equities in the last gasp of the dotcom rally in August 2000.”

To read the full FT column, please see HERE (FT subscription required) 

Clients can read the latest from ASR on valuations in:  ASR Equity Strategy - Risk Rotation – 18 May 2023 

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