Is there value in US equities?

0:12Hello and welcome to the latest edition of the FT Advisor podcast. I'm David Thorpe, Senior Investment Editor at FT Advisor and today we are discussing the outlook and prospects for US equities after what has been a turbulent period for the asset class. Joining me to discuss the topic are Nick Kiridge, recently installed as a Global Equity Fund Manager at Brown Advisory, Paul O 'Neill, Chief Investment Officer at Bentley Reid, and Hugh Gimber, Global Market Strategist at JPMorgan Asset Management. Thank you all for joining me today. Hugh, if we come to you to start us off with the first question.

0:53in common with most other markets really u.s equities sold off on fears around the consequences of the current conflict in iran but a notable feature was that certain large cap u.s technology stocks actually held up quite well and maybe showing defensive characteristics that had previously not been obvious that was coming off a period of relative underperformance though but What is your view on the prospects for those large-cap tech stocks now? Are they ahead against geopolitics? Well, thank you for having me, first of all. And the short answer is no, I don't think they are. I think the market moves that we've seen since the conflict escalated in Iran tell us more about the popular positions going into this shock rather than the true defensive hedges.

1:43So if I look at what has performed well or badly since the end of February, the dollar has been rallying. That was a popular consensus short coming into this shock. Gold has been down. Korean equities have been hit hard. Japanese equities, emerging market equities all hit hard. I think this tells you a lot about how the market was positioned coming into this and frankly less about where in the economic environment you have companies or countries that are most exposed. You could throw UK guilts into the mix as well. Another popular long coming into this shock and obviously the UK guilt curve has been hit hardest.

2:18So going forward, I don't buy the narrative that the US economy or US markets are much better insulated to this. You think about the role that gas prices play in consumer confidence and how the US consumer drives the economy. I personally don't believe that the US is as insulated as many people believe. Thank you. Paul, from your point of view, are you thinking differently about those? Yeah, a little differently. Yeah, likewise. Thanks very much for inviting me today. I mean, the tech stocks did in fact act as a bit of a hedge, but are they a hedge? I guess there are pros and cons. I think you can argue, look, they are the size of countries, some of them.

2:59They have incredibly strong balance sheets. They don't really have the same exposure to an oil shock or an energy shock that other sectors of the economy do. So why would they not be a hedge? I think really what they are, I think there are better, more direct hedges, the traditional ones, so it could be gold. It could be oil. It could be US treasuries. A more direct hedge would be defense stocks than tech stocks.

3:26But they've really acted as a safe harbor, let's say, rather than a direct hedge during a period of tumult. And one can understand why. I think if you take that aside, you've got to remember these stocks have got their own risk going forward. The overconcentration, the AI spend, the circularity of a lot of the deals. But I would say as a safe harbor, yes. but if you're looking for a proper hedge, there's better things out there. Thank you. Nick, just to give our readers, our listeners indeed, some context, you recently joined Brown Advisory to run a couple of funds, both of which are value funds, one of which is an ex-US fund, right?

4:01Yes. And one of which can own US equities, and you're very well known from previous career as a value manager, so maybe not a natural buyer of large-cap US tech in recent years. So with all of that context there, how do you view the investment case for those things right now? And has it changed recently? It may be about to change. We're certainly seeing some pretty seismic moves in that market. I thought I'd seen a lot of things. But, you know, it was strange a couple of weeks ago to see dozens and dozens of stocks off 10%, 15%, 20 % in a day. And then the thing that was really odd about that was not that because that does happen.

4:38But then looking at the market, the market was flat day after day. Huge rotation, just massive rotation. And, you know, that might be right, that might be wrong. But for me, when I see shares move like that, it's almost always behavioral. There's something emotional going on. It might be that they're correctly priced now or they were before, but it didn't change 30 or 40 percent in three days. So these things are hopefully things that value investors can take advantage of. I'm a little bit in Hughes camp on this, I think. like it's the entire premise of the question tells you how narrow the US market has become over a prolonged period of time and how the concentration of that market is such that really we just talk endlessly about six or seven stocks because they have such an enormous influence on the markets.

5:25And, you know, they are they are a kind of fascination and an occupational hazard for those of us who are trying to outperform benchmarks over time. I think what I would say is that to me, the only real safe harbor that exists in equity investing, the only one is diversification. Everything else might work for a period of time, or you might get lucky or clever, but really spreading your bets around. And in that regard, what I would say is you want the deepest pools and the broadest pools. So in the US, I'd be looking outside of some particular opportunities in software and technology which are starting to become interesting for the first time in a very long period of time.

6:06I would be looking down the cap spectrum and across the market at some areas that the US has been a two-tier economy for a long period of time with some stocks doing very well at a headline level but many not doing well and presenting an opportunity and then more widely outside of the US there's obviously deep opportunities in international markets so both are interesting. Thank you and Nick we'll stick with you for the for the next question. One of the things that our readers flagged last year, our readers have been predominantly in the UK with UK clients, was the impact that dollar weakness had on their portfolios.

6:43Their clients were coming to them and saying, you know, the S &P is up whatever it is, 17, where's my 17? You're actually only getting 12 or whatever because of dollar weakness. but how do you have to think about that? I mean presumably most of your new clients are outside of the US and so we'll get their returns in starting. We're lucky we have a big US client book too and a big US private client business at Brown that would buy international funds but this dollar question is very, very relevant to all of them. I think we've been through a long period of time where the dollar has treated you very well as an offshore investor frankly This is one where I think a little bit of experience and perspective really helps.

7:28There will be a number of investors investing over the last 10, 15 years for whom this has felt like a one-way directional bet. I started my career in 2000, and that was a period in which the world looked very different. And you basically went on a seven, eight-year run where the dollar weakened more than 50%, completely collapsed, and international markets were in the ascendancy. that feels bizarre relative to what we've experienced over the last 10-15 years. Are we at a kind of another pivot point there? Come back to it, I'm not going to directionally bet any of our portfolios on that. But it is, there are a confluence of factors you would look at and I would leave it to some of the other guests on the podcast to kind of opine on the macro in a more sensible way than I'm able to about what that might mean.

8:11I would say again, and I'm a bit of a broken record on this, directionally we're trying to invest in as many companies as possible that we don't end up with a specific tilt within the portfolio such that we take a big directional bet on this because frankly being honest with you one thing I've become more comfortable saying after 25 years doing this is I don't know and if I don't know then I don't want to bet my client's money on a view. Thank you Paul obviously Bentley Reid has a London presence but also a presence in in other parts of the world a lot of your clients are outside of the the us whether it's sterling exposure or something else and how relevant or how important have you had to uh consider as a firm uh the dollar weakness or dollar strength if that's what we're about to see again i mean i agree i think it's been very kind to investors recently um we try and look at it strategically and just say look it's an important component of overall returns but it's not the main driver the key things for us are always things like valuations and earnings growth having said that it's very difficult to bet against the u.s it doesn't tend to have paid off in the past so we say we don't want to be structurally underweight the dollar that's just at a headline level do we think it's got some issues going forward, such as the debt levels and the policy uncertainty and probably lower rates, and investors certainly looking at opportunities outside of the US.

9:45Yes, we do. And we will sort of diminish the weight of the US dollar opportunistically, if you like. But we're always thinking it's not a good thing to do strategically, because in times of turmoil, like we've seen, it does tend to strengthen. And that's always a bit of a buffer for our clients. Thank you. Hugh, is this something that your clients at JP Morgan Asset Management have been asking about or wanting of you on? Definitely. This is coming up more and more. And just to expand on a couple of the points that have already been made, I completely agree with the idea that the dollar has been kind.

10:23But I think it's been kind in two different ways. It's been kind because it's been a tailwind for overall returns. So for sterling investors, from the period between 2010 and 2024, the dollar added roughly 2 % in additional return to your US equity exposure. But then critically, the second way it's been kind is the relationship between the dollar and US equities. So over that period, you had this really nice negative correlation. So if US stocks were down, the dollar was generally up and therefore offering you some diversification. I think what's changed now is that we're more likely to see that correlation flip.

11:01And that's what's going on at the moment. You have US equities performing well and the dollar rallying. I think going forward, it's going to be less likely for our sterling clients that you see that relationship working where the dollar can offer you a hedge against US equity weakness. Rather, we're now in a world where the dollar is likely to be compounding gains and losses. and for us that means that the case for regional diversification in equity portfolios gets even stronger not only reliant on some of the broadening of growth that we're seeing around the world at the moment. Paul, it seemed to be a long period of time but more pronounced at the start of this year that the only part of the US economy that seemed to be growing strongly was the AI bit.

11:47You know if you took AI spend out of GDP where were you? The headline GDP number was okay uh nick referenced the idea that we've had a two-tier economy in the u.s for a while sometimes that's called k-shaped but putting all of that together how do you think about diversification within a u.s equity allocation what does that look like how does one achieve it is it factor or market cap or something else yeah i mean i guess first of all we would also always start with diversification across region you know but and then obviously the u.s is a big component of whatever kind of mandate that you have.

12:22So once you're in that, how do you look at diversification? Well, we're always open to good ideas. So it could be a value factor ETF. It could be the small cap. It could be the Russell 2000. It could be the equal weight. It could be all sorts of things like that. The reality is at least over the last few years, they've tended not to pay off. And so you suffer as a portfolio manager or wealth manager. And so there's quite a high bar for taking those kind of allocations. What we try and do sometimes, we have a thematic approach. So if we come up with a good theme, one example being US healthcare recently that we've invested in, that's the way we might get diversification away from some of the AI tech stocks.

13:05Why do we look at healthcare specifically? It's had a tough time politically. Valuations are very attractive, both relative to its own history and the rest of the market. That's the kind of sensible thing rather than just taking a blanket uh s &p 500 equal weight allocation thank you nick um you referenced diversification and as a as a value fund manager i guess by your very nature you're going to be diversified away from the big tech stocks but in a two-tier economy and to use your phrase what does a diversified a diversified exposure look like i think that's a very good question it's worth kind of saying something before we start which is I still think there's an elephant in the room about diversification, which is when we talk about global funds, we're still looking at a benchmark with 70 percent in the US.

13:53And therefore, people start from that as being that's the starting point. Typically, people go, do I get underweight or overweight that? I think if you took the names of the countries off it and said, I've got a fund and 70 percent of it is in one thing, whatever that thing is, is it diversified? People would say you're bonkers. But we've ended up where we've ended up. And I think that makes it a difficult starting place for diversification for many investors. We like to try and think about it in absolute terms and therefore thinking what would we do with our own money in absolute terms, what's worth more?

14:24And so we don't start with that benchmark construct. Your point about the US is a really good question. I would completely agree with US healthcare. I think that feels like a dangerous thing to say, but slightly fat pitchy in the context of history. There's quite a lot of us in value who are edging towards that. There are lots of different parts of that market, you know, managed health care, you know, outsourced R &D and CROs, some of the just the drug developers themselves that look kind of undervalued. So that's interesting. I think there are some other large stocks. We talked a bit about software starting to come in the right direction.

15:00I don't think that is bargain basement in any way. There are a couple of things that are tempting you into it. And I think you should be discerning there because AI will fundamentally change that market. You know, the old adage about in the short term, investors tend to overestimate change. And in the long term, we underestimate change, I think is going to turn out to be the right one for AI. And then I would encourage people to look down the cap spectrum in the US. So it sounds ridiculous. Sounds like I'm kind of advocating small cap. In the US, things have got so large and things have been so successful that broadly, when you speak to my colleagues and say, what is mid cap?

15:37A lot of them say$50 billion. It's just kind of wild. It would make you enormous anywhere else in the world. So you don't necessarily need to go down into penny stocks. I'm talking about, you know,$5 to$50 billion companies where there are a lot that have been left behind over the last kind of five, six years, particularly those related to, funnily enough, interestingly, consumer, which has been the engine for the US for a long period of time. A lot of consumer facing stocks have not been doing well as people have traded down people are under pressure inequality has gone up in the us so there definitely are bargains to be had you've got to roll your sleeves up and go and look for them though thank you um hugh from from your point of view what does that diversification piece uh look like um is it is it and and you know what does how does one think about a k-shaped investing in a k-shaped economy definitely so for me here the critical piece is to differentiate between what is a broadening out of returns across the US market and what is genuine diversification.

16:37And I think sometimes those two themes can get somewhat tangled up. So if I was to take small cap as an example, I think it is a good way to position for the broadening of returns across the US market. But I'm not convinced that it would hold up that well if we saw the big tech names come off hard. And that's because tech is critical to the US economy today. It's not only critical in terms of the capex investment that's being made, but it's also key to the US consumer because the US consumer has a high degree of its wealth positioned in the US stock market and therefore if tech stocks get hit the US consumer gets hit and you see the economy overall getting hit.

17:14So this is where I think to both Paul and to Nick's points you have to be quite targeted if you're looking for genuine diversification, healthcare being a great example and to be very clear in differentiating between that and then some of the other opportunities that we are finding for the broadening out of returns across the market, but being very clear that that is contingent on continued tech strength, supporting both the capex angle through to the economy, as well as the US consumer overall. Thank you. Nick, it used to be, I guess, an adage in markets that US politics was relatively boring, whichever party one or broadly pro-business, and you might get a slightly better one than a slightly worse one, but the delta of outcomes in the US was much smaller, much narrower than in the UK or in many parts of Europe.

18:08Let's say there's unpredictability in US public policy now relative to its own history. That's the politest way I could write that sentence. In your view, have US equities lost, do they no longer deserve a stability or a political premium that they might previously have had? And if that's the case, how does that fit into the portfolio construction of a value fund manager? There's a lot to say on that subject. I'll try and keep it brief. I mean, I think your point is exactly spot on, which is, if you're listening to Donald Trump, who's saying, come and unsure all of your manufacturing here. Otherwise, we won't let you have access to the US consumer.

18:48We'll make it very penal for you to sell into our market, all the rest of it. The reality as a CEO today, as you know, that by the time that factory is complete, running and producing things, someone else will be in the White House. And so, you know, is this policy really going to be around for 10, 15 years, which is the time period over which you're thinking about the returns from investment? And everyone pays lip service to today, but I think the jury is out on that. I definitely think some of the things at a high level, some of the things, and this doesn't get well talked about that have supported the US over the last 10, 15 years.

19:22There are two or three specific things that just never get mentioned that have been incredibly supportive for policy that question whether or not they're going to reoccur. The first is, and this is a political hot potato, is immigration. Immigration has been very high in the US over a period of time, and that's really, really helped GDP. Whatever you think about that as a policy, it is something that contributes very strongly to economic growth. The second is the whole energy switch. The US went from being a massive energy importer to a basically completely self-servient. It was their North Sea oil moment, shale.

19:57And the impact that has had in terms of turbocharging the economy and insulating the economy from global shocks, we see it today in terms of what's going on with the oil price, has been enormous. And I think some people underestimate that. And then the final thing is obviously the productivity growth from MAG7 from those companies. If you were to strip out those big companies, earnings per share growth has been basically in line with the rest of the world over the last 10 years. So pretty extraordinary. I think you're looking forward to what extent we think all of those factors either will reoccur or can be replaced by new things.

20:28The US is a very dynamic economy. It's very impressive. They take risk, they make return. And so I think there will be more of these things. And I don't expect the US economy to roll over and die in any way. But I do think it's worth us highlighting the favorable nature of some of those drivers over a prolonged period of time. You know, being very straightforward about it, if you took risk in almost any way, your investment portfolio, starting a business, investing in a new factory over the last 15 years in the US, it paid off. If you did the same in international markets, and particularly in the UK in the last 15 years, you got hit in the face with a pan.

21:06When you take risk and it pays off, what do you learn to do? You take more risk. The virtuous flywheel is very strong. When you take risk and it doesn't pay off, what do you learn to do? Don't take risk. And that's why these things go on for very long periods of time when they're set in their path. The question is whether or not I think the$64 ,000 question is whether or not some of the policy uncertainty that is going on now, we think it's a negative, but actually it's going to shake up some of these things over the next 10 years. Europeans won't be able to simply milk US consumer. They'll have to invest themselves.

21:38You can see what Germany's doing with fiscal policy, etc.

21:44It's not priced in. You're not paying for it in international markets. But certainly, I wouldn't bet against a change in the order over the next 10 years. Hugh, from your point of view as a market strategist, do you have to view the macro differently in the US? given the, you know, I mean, Donald Trump came in talking about, you know, foreign wars and foreign adventures were a bad thing and now he seems to be at war on three fronts at once. Does that change how a market strategist looks at asset allocation? The dollar is the first place I would look here because to Nick's point, the US is still full of amazing companies, incredible balance sheets that will be here for many years to come through many different political administrations.

22:29But the US dollar is where I think investors are first looking at the moment when they want to express a view on a changing political dynamic. You think through the way the dollars reacted to the tariffs, not only when they were first announced last year, but also subsequently to the Supreme Court decision more recently. You think about the way the dollars reacted to some of the question marks that we've had around Fed independence, for example. And so this is highly relevant for UK-based investors because it is going to influence that relationship between the dollar and US equities that I was speaking about previously.

23:06But I think it's important to strip these two out separately because it is not clear to me that whoever's in the White House should have a huge influence on the valuation of some of these companies which are incredibly international and, again, are working over a much longer time frame than one political administration. Thank you. Paul, from your point of view, and given that the Bentley Reid client basis isn't managed jurisdictions around the world, do you think differently about the US? I think certainly to an extent, yeah. I think our view is that the US equities have lost a bit of that stability premium, which was probably elevated to start off with.

23:46But when you add in the debt levels that the country has as well, and now the unpredictability and some of the, certainly the policy announcements, investors are actually looking for other places to invest and would like to probably reduce the allocations to the US market, which is very high, both in the 70 % of the global benchmark, but then the concentration within the US itself. So we're looking for alternatives, but the question is where? So the US has still got the deepest, most adventurous or innovative capital markets, and that's always going to be the same. So do I see it changing things hugely?

24:24The big question is whether it persists over the next administration or not. And we don't know who's going to come in, and we don't know what kind of door we've opened now by some of the leaders that we already have and some of the approaches to the world that have been shown to work, at least in the near term, does that kind of continue? If it does do, then I think the premium will continue to diminish. But for now, I would probably say it's just lost a little bit of its halo. Thank you for that, Paul. That's about all we have time for this edition. Thank you to Paul O 'Neill, Chief Investment Officer at Bentley Reid.

25:01Thank you to Nick Kiridge, Global Equity Fund Manager at Brown Advisory. and Hugh Gimber, market strategist at JPMorgan Asset Management. And thank you all for joining me. Please do remember to tune in to future editions of the FT Advisor podcast.

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