Is the US Market Finally Peaking? Ruchir Sharma’s Take

0:00Ruchir Sharma:So much of investing as you know, wealth is about expectations. Expectations of America got too high, expectations of the rest of the world were too low. And I think that that expectations gap has been closing for the last year, and I think is likely to keep closing for the next three, four, five years. Typically, international outperformance is associated with dollar weakness. And my point is that once a dollar bear market starts, it tends to last for about five to seven years. So I think this combination is likely to lead to America's stock market underperforming the rest of the world for the next few years.

0:40Ruchir Sharma:And also because of the recognition that the rest of the world, whether it's China or even the likes of Korea or Taiwan, that these countries also have technological prowess. It's not just America which has that. The Fed has missed its inflation target of 2 % on the core PCE for 56 months in a row. And I don't see any justification for interest rates cuts. But if they do cut, which they probably will because of the political pressure, I think that that is not good for the US dollar.

1:16Wilfred Frost:Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today, Roshir Sharma, is the head of Rockefeller International and the founder and CIO of Breakout Capital.

2:00Wilfred Frost:Previously, he was the head of Emerging Markets at Morgan Stanley Investment Management, a role he took in 2003 and added to it the broader title of Chief market strategist from 2016. He left Morgan Stanley in 2022 and has become even more prolific and successful with his writing since that departure. Breakout Nations, The Rise and Fall of Nations, Democracy on the Road, What Went Wrong with Capitalism, amongst some of his best-selling books. Rushir, so great to see you again. Thanks so much for joining me.

2:35Ruchir Sharma:Thanks, Wolf. Good to be back with you after all the interviews we have done in the past with CNBC.

2:42Wilfred Frost:Exactly. And great to have a chance for a longer form discussion. And just remind me when Breakout was founded. Is that more recent than your move to Rockefeller? By the way, we had Greg Fleming on, of course, the CEO of Rockefeller. But was it at the same time or did one follow the other?

3:02Ruchir Sharma:At the same time, Wils, because after a 25-year stint at Morgan Stanley, I thought it was time to move on. And I both wanted to create my own firm, which is what Breakout Capital is, an investment firm focused on emerging markets in particular, but really global investing. At the same time, to carry on my association with Greg, because Greg and I had worked together at Morgan Stanley, where he ran both the asset management and the wealth management business. And so he and I decided to associate with each other, with me sort of coming in as chairman of Rockefeller International. So both these things happened in parallel.

3:42Ruchir Sharma:And that's, I think, always been my life mantra, live life in parallel. So it happened with my writing and my investing. Now it happens even from a career perspective, with both breakout capital and with my association with Rockefeller.

3:58Wilfred Frost:Well, I refer people back to our episode with Greg, well worth checking it out. I also refer people back to the bonus episode we did with Rasheer, focused on his views on the latest in the Middle East, if you haven't listened to that. Rasheer, I wanted to start by talking about the broad topic of US exceptionalism, which you've written a lot about in recent years. And I guess the first question would be to touch on US growth outperformance in recent years as opposed to more broadly this century. And a lot of people point to the tech innovation, most recently AI. Is that the core reason in recent years in the same way that it was in recent decades for US outperformance on the growth side?

4:43Ruchir Sharma:Yes. Like the 1990s was the last period where the US outperformed the world very significantly. Something similar happened over the last 10 to 15 years. You know, like I wrote my first book back in 2012 called Breakout Nations. That book was supposed to be an economic travelogue of mainly emerging markets. But I ended that book back in 2012, really by saying that the true emerging nation in the world was America, not the bricks and all which were being hyped up back then. And I always regret that. I wish I'd invested my money accordingly rather than only having spoken about it in a book. But I'd say that that was really, I focused on the technical, sorry, like the technological prowess of America back then and how that was likely to lead to America's resurgence when people were very negative on America.

5:41Ruchir Sharma:Remember that back in 2010, 11, when I was writing that book, the S &P had downgraded America and it appeared as if America coming out of the global financial crisis was really limping along. And the decade was widely thought to be the brick decade back then. And then that reversed very quickly in the subsequent years. But what happens with all these trends is, you know, Wilf, is that like, and this is what even classifies as a bubble, that it's a good story which goes too far. And I think that's what happened in America too, which is that you got this incredible period of outperformance. A lot of it, as you said, was led by tech and the huge Silicon Valley's prowess came to be recognized by everybody with so much capital coming in.

6:30Ruchir Sharma:And then you got the AI wave where America was seen to be absolutely at the forefront of it. All this attracted massive amounts of capital to America and still does. But then things become overvalued, overowned. And that's what we saw in America as well, which is that, you know, at the end of 2024, America's weight in the global equity indices was approaching 70 percent. You know, that's just staggering because America's weight in the global economy is still under 30 percent, but its weight in the global equity benchmarks was getting to, you know, across 65 percent was approaching 70 percent. And the whole world just wanted to say that we just want to own America.

7:16Ruchir Sharma:Everything else is irrelevant. And my point was that this feels like a bubble. you know, the fact that if everyone is sort of so excited by the same theme. And so I wrote that piece then saying that this American exceptionalism, which even I believed in, you know, was likely to fade because there's just no way that the 70 percent of the world's capital should be concentrated in one country. And this decade also about 80 percent of all investments in the stock market around the world had gone into just America. So this was just very exceptional. So yes, that was a big reason for America's outperformance.

8:00Wilfred Frost:And obviously, you called that at the end of 2024. And last year, we did see international markets outperform US markets. I guess my question to follow up, though, is the extent to which that relatively brief and relatively small rotation into international markets is finished, or if it's just the beginning. And paired with it, the US still rose last year. It's not like we saw a bubble burst by any stretch of the imagination. So where are we on that process of unwinding, I think you said, the overvaluation, the overinvestment that happened?

8:35Ruchir Sharma:Right. I think that my stronger conviction is the fact that I feel that this international markets outperforming is still in its early stages. Now, if you just step back in history, what you see here, Wilf, is this, that, you know, that the American market over time tends to do very well. But after a very strong decade, like in the 2000s, like in the 1960s, you know, like America tends to underperform for a few years after that, you know, so that just sort of working away those overvaluation, it doesn't have to be a decline or a burst. But the 2000s was a very instructive decade, which is that the S &P 500, you know, didn't go anyway, really.

9:20Ruchir Sharma:I mean, the returns were relatively flat that decade for the S &P 500. But the rest of the world's markets did very well and caught a bit. Now, this doesn't happen for no reason. It happens for a reason. And I think that what you see is the fact that the rest of the world, the earnings growth is picking up much more significantly after lagging that of America. If you look at the total shareholder return, buybacks plus dividend yields, the rest of the world, in fact, is giving you more than America is today, which is a big change from what used to be the case. And of course, the starting point valuation is still much cheaper for the rest of the world.

10:01Ruchir Sharma:And the dollar is a very important angle here that typically international outperformance is associated with dollar weakness. And my point is that once a dollar bear market starts, it tends to last for about five to seven years. Again, something which happened in the 1970s, something which happened in the late 1980s, and again, something which happened in the 2000s. So I think this combination is likely to lead to America's stock market underperforming the rest of the world for the next few years. And also because of the recognition that the rest of the world, whether it's China or even the likes of Korea or Taiwan, that these countries also have technological prowess.

10:47Ruchir Sharma:It's not just America which has that. So there's a catch up going on in the rest of the world. And I think that even in Europe, where things were so gloomy, so pessimistic, and the base was so low, the European banks had been quietly outperforming. So, so much of investing, as you know, is about expectations. Expectations of America got too high. Expectations of the rest of the world were too low. And I think that that expectations gap is closing in the coming, has been closing for the last year, and I think is likely to keep closing for the next three, four, five years.

11:29Wilfred Frost:This episode of the Master Investor Podcast with Wilfrid Frost is sponsored by BMY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice.

11:51Wilfred Frost:let's come on you mentioned the dollar there as being critical to all of this to the fed outlook how many obviously this last few days might change perspectives with oil prices but how many cuts do you think there should be this year and how many do you think there will be i don't see the

12:08Ruchir Sharma:fed cutting interest rates really uh anytime soon i think there's no justification for the fed to be cutting interest rates. And I think that the reason is this, which is that the Fed has missed its inflation target of 2 % on the core PCE for 56 months in a row. And there is no sign that the inflation is returning back to 2%. The core PCE, which the Fed tracks, is still very much closer to 3 % rather than 2%. So I don't see any fundamental justification for interest rate cuts. The US economy is doing fine. It's growing, you know, it's slowed a touch, but it's still growing at 2%. Inflation is closer to 3%.

12:54Ruchir Sharma:And the financial conditions are so loose, which is that you just look at the financial markets, you know, there's no sign that monetary policy is tight. So I see there's no justification for the Fed to be cutting interest rates. Now, having said that, I think that the political pressure may be such where the Fed may cut interest rates once or twice. And I think that that's a dollar negative because in this environment, to be cutting interest rates, you know, when your nominal GDP is growing at 5 % or so, and the Fed's interest rates are already at 3.5%, I think that is already like relatively loose monetary policy.

13:35Ruchir Sharma:And I don't see any justification for interest rates cuts. But if they do cut, which they probably will because of the political pressure, I think that that is not good for the US dollar.

13:46Wilfred Frost:Clearly, that's one of the factors that has driven gold higher. I'm keen for you to sort of set the scene broadly on gold, because historically, when we had many conversations over the years, you were a kind of rare gold bug on US business television, where it was all about equities, domestic equities. um since uh 2022 you've you've been right on gold you i think i picked up in some of your op-eds you've turned maybe not bearish on gold of late but but i saw a word you use was agnostic towards gold so just just set up where you are right now on it yeah so like i always thought

14:24Ruchir Sharma:that gold and commodities in general deserve a portfolio in the uh deserve a place in the portfolio because of the diversification benefits that they bring. And I felt that gold in particular, something different was happening in 2023. Because if you look at the long history of gold wealth, it tends to move in line with inflation expectations, right? And also, when real interest rates are low or declining, that's when gold does well. Because gold doesn't yield anything. So if you don't hold gold if you're getting paid well from your fixed income instruments, but if those fixed income instruments are not yielding much, that's when you want to hold gold because you may get a price appreciation.

15:09Ruchir Sharma:You're not losing much money by putting money in the bank or in fixed income instruments. So that's typically when gold does well. But in 2023, I noticed something different, which is that gold had started to rally, even though real interest rates were relatively high. The Fed had raised interest rates quite significantly in 2023. And then what revealed itself was that central banks around the world were buying gold in substantial quantities triggered by the way the US had imposed sanctions on Russia and seized the assets in 2022 as a reaction to the war in Ukraine. So that goal was beginning to sort of be a diversification asset for central banks in a big way.

15:59Ruchir Sharma:And so that gave me some confidence that something different was happening. And when an asset begins to behave in a way which is different from what is predicted by macroeconomic models, you need to take note that something different is going on. So that's what made me even more bullish on gold. But what's happened in the last few months is that the price actions become completely parabolic, which is that, you know, that even though central banks have slowed down a bit, they're still buying gold, but they've slowed down their purchases. Now you have retail investors from China to India, of course, ETFs in the US, that people are just piling in everywhere.

16:42And they all have their

16:44Ruchir Sharma:own reasons for buying gold. There's no fundamental reason that they cite. Some people cite geopolitical conflict. Some people cite dollar debasement. Some people cite the fact that the Fed may cut interest rates. And so therefore, it's good to hold it. And yet the other asset markets don't quite back it up, which is that if really, you know, dollar debasement and those kind of things were driving it, then in the last few weeks and months, in fact, the dollar, even though it's weakened over the last 12 months or so, the last few weeks or so, it's been relatively stable. And yet the price of gold has gone up.

17:21Ruchir Sharma:Similarly, U.S. bond deals have been relatively stable. So there's no big capital flight happening from the U.S. or something, yet the price of gold keeps going up. So I think that I'm a bit concerned that going back to my original definition of the fact that there's no good story that too much money can't spoil. And so I think that's what's happened with gold, that too many people have come on to this. And so that's what makes me a bit concerned that gold may be overheated now. Now, like in the long term, I still feel it's a very good diversifier, but I would recommend people to possibly spread their love a bit, which is that if you want more inflation hedges in your portfolio, why don't you buy some more commodities or even some tips, you know, which are inflation protected securities.

18:09Ruchir Sharma:I think that that's a way to buy greater inflation insurance in the portfolio or inflation hedges in the portfolio rather than just buying gold at this stage. I would still have gold, but I just would not be that excited about buying more at this stage, given how parabolic the price action has been in this particular commodity.

18:29Wilfred Frost:Before I get on to some of your takeaways from your books, Roshia, one final kind of very market-focused question. You seem kind of relatively relaxed about the outlook for the US equity market in absolute terms, even if there are relatively more attractive markets. What about what we've seen in private credit in the last few days? Are you still relatively calm on that outlook for the US in absolute terms, even with those risks kind of rearing their head again?

18:58Ruchir Sharma:No, I think that as far as the credit markets, that's exactly it. Typically, it's the credit markets which signal wider problems in the economy. And private credit in terms of just the growth which they have seen, like we've done work on this, which is that it's not the level that matters most, you know, for debt. It's when the pace of increase is very significant, because if you make a huge amount of loans in a short span of time, you're bound to have made some bad loans. So I think that I totally agree that the biggest risk to the US equity market is the private credit market. That if that, if something really blows out there, that could have negative consequences.

19:47Ruchir Sharma:The only thing which gives me some comfort is the fact that the scale of the private credit markets is still not that big. I mean, if you look at the total increase, it's been very dramatic, but the size of the private credit market is still under $2 trillion, which in an economy of nearly$30 trillion is not that big. So therefore, I'm less concerned about private credit being a huge systematic risk for the US economy, a systemic risk rather. But I am concerned about the fact that if private credit truly does blow up, it will have negative consequences for the equity market. It just may not be the same kind of magnitude of what we saw in 2008 or something.

20:35Ruchir Sharma:But as I said, the scale of the private credit market. The pace of increase is worrying, but the overall market is still not that big to pose, I think, a huge headwind for the US economy.

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21:24Wilfred Frost:Hi guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five star rating and leave us a comment. It really helps other people find the podcast too. Now, back to the episode. I wanted to talk, Roshir, now about inflation, elections, also about your book, What Went Wrong With Capitalism. But having touched on the Fed and gold prices, you know, so often in the last few years, those of us that crossed markets and politics have observed how inflation is this kryptonite for all politicians, because it reaches everyone in a way that, you know, oddly, recessions don't necessarily, unless you lose your job.

22:14Wilfred Frost:And I think the assessment, you know, here with the Tories in the Conservatives of 2024, with France recently, with Biden recently is, with inflation, it's the incumbent leader that gets smashed almost regardless of what else they've done. You've been doing some analysis and say that only really holds in recent years for developed markets. And almost the opposite is true in a lot of emerging markets.

22:40Ruchir Sharma:The analysis that I did, Will, for this, that there's an anti-incumbency wave, which is spreading across the developed markets, that typically in developed countries, the incumbent always had an advantage, right? Which is that if you were the incumbent, you had the media exposure, you had the platform, and that your chances of getting re-elected used to be relatively high. But in the last decade, what we've seen is that about 70 % of incumbents have lost their re-election bid across the developed market. So that's a big change which has taken place. And it's an issue that I've covered a lot in my book on what went wrong with capitalism.

23:24Ruchir Sharma:It's partly because people are just not happy with the current economic system that they have and the results that they're getting. There's a feeling that the system is rigged against them. And I think that that's the reason you have such a strong anti-incumbent wave running through the developed markets. Now, in emerging markets, I think that the, you know, that the governance has been somewhat better, that they have got inflation under control in most countries. And also the fact that, you know, that they have learned how to, like in places like India, how do you use digitization to more efficiently transfer welfare benefits to people, which is what has helped reverse the anti-incumbency in countries such as India.