America Ascendant, Goldman Ascendant
U.S. stock markets have far outpaced the rest of the world since the crisis. They have done so relentlessly and consistently. In the process, stocks have grown very expensive by conventional metrics. Most stock markets in the rest of the world have not. This leads many (including me) to fear that we are due for a big reversion to the norm. The U.S. cannot stay dominant that long.
I have been making variations on this argument for many years now, and they have all been wrong. (Or, at least, too early — and any Wall Streeter will tell you that means the same thing.) So I was glad of the opportunity to talk to Goldman Sachs Group Inc.’s Sharmin Mossavar-Rahmani, who has for years been the CIO of the bank’s investment strategy group, and has year after year since the crisis been making the same two-part call: stay invested in stocks, and expect America to remain preeminent. I have a strong inclination to dismiss this as an investment bank’s natural urge to be bullish at every opportunity, but unfortunately for me this call turns out to have been correct so far. The latest outlook from Mossavar-Rahmani’s team is called “Room to Grow” and features a baobab tree on the cover, because such trees can keep growing for centuries. So nobody can fault them for hedging their bets.
The first stage in the argument is that, very simply, U.S. companies have managed to increase their earnings in a big way since the crisis. Companies in the emerging world, and in the rest of the developing world, have not. She is right about this. This is in part because the FAANG (named after Facebook Inc., Apple Inc. Amazon.com Inc., Netflix Inc. and Google's owner Alphabet Inc.) internet giants come from the U.S., and now make large chunks of their profits elsewhere, but that doesn’t affect the argument for buying equities from the U.S. rather than elsewhere. This chart compares 12-month forward earnings for MSCI’s indexes of the U.S., emerging markets, and EAFE (Europe, Australia and the Far East):
Beyond that, there is exorbitant privilege. If investors want a shelter, where can they find it other than in the U.S.? Both the euro zone, thanks to its sovereign debt crisis, and arguably also China, with its badly mismanaged currency devaluations of 2015 and 2016, have shown that they cannot match American assets as a shelter. The U.S. is still the place to go in a crisis. This was rammed home in 2011, when investors sought shelter from the shocking decision by Standard & Poor’s to downgrade U.S. Treasury debt from AAA by buying Treasuries.
The Goldman team argues that the coronavirus outbreak only serves to underline continuing American preeminence. Even if peak fear about the virus in markets passed some two weeks ago, Mossavar-Rahmani suggests that the market has been too sanguine, and that the outbreak will serve to underline American advantages. Growth in the U.S. is more insulated from China now than it was in the growth scare that followed the 2015 Chinese devaluation, and financial conditions are easier now.
Taking all this into account, Mossavar-Rahmani argues that U.S. equities are fair value compared to equities in the rest of the world. I have argued against this over the years, and American stocks have continued to perform better, so I give this case due deference.