Is the end nigh for American dominance?
Geert Van Herck
Chief Strategist KEYPRIVATE
January 30, 2023
4 minutes to read
Since the end of the global financial crisis (2009), US equities have turned in a strong performance. For example, the US S&P 500 has far outperformed its European and Asian counIs the end nigh for American dominance? terparts, thanks mainly to a number of technology shares such as Apple, Amazon, Google and Facebook/Meta. However, a reversal now seems to be in the offing.
And we think there is an important lesson to take from this:
Do you have an internationally diversified portfolio? Check your exposure to US equities now and consider reducing it!
The stock market year 2023 has already started strong, something which investors with a good memory will be looking at favourably. Whenever the month of January has ended positively in recent years, it has often been a sign that we would end the year in the black. However, we need to dig a little deeper into this, because there is a new, non-trivial detail to consider at the start of 2023. It is striking that this time around, the European and Asian stock markets are outperforming the US markets.
This makes it an interesting period for the stock market right now. Are we seeing the end of American stock market dominance? Equity investors have been accustomed to the S&P 500 or Nasdaq setting the pace. Should investors therefore switch to European and Asian equities?
At Keytrade Bankj, we believe we are in the early stages of a trend reversal. We therefore strongly believe that a gradual reduction in US equity exposure could be a good strategy. We would reinvest the proceeds in European and Asian equities.
Facts and figures
Analysts can learn a lot from Figure 1. This chart started way back in the 1970s and clearly shows there are cycles in the relationship between the US and the rest of the world. On average, the cycle lasts around five years. During these five years, either US or other shares perform better on average. Compared to this, the most recent cycle of US outperformance has lasted for a very long time – a full 15 years. But if you take a closer look at the end of the graph, you will see signs of a sharp trend reversal since the start of this year.
Figure 1: US stock exchange versus EAFE (meaning Europe, Australia and Far East)
Source: All-star Charts
Figure 2 shows the performance of certain European equity markets compared to the US S&P 500. What does this show us? These relative graphs have bottomed out since last year. Since October 2022, there even seems to be a rising trend. This means that Spanish, Swiss and British shares are generally outperforming US shares. Together, these three European regions account for around half of the MSCI Europe Index.
Where has this upward trend suddenly come from? Much of this outperformance can be explained by the fact that this European benchmark index is far less exposed to technology than its US counterpart. In 2022, US technology shares suffered because of their sky-high valuations. On the other hand, European shares are valued more cheaply from a historical perspective. This makes them more attractive for international investors at present. The cheaper the valuation of a share, the higher the expected return over the next 5 to 10 years.
Figure 2: Spanish, Swiss and UK stock exchanges vs S&P 500
Since 2009, US equities have been the prime investments to hold. In euro terms, they generated an average annual return of around 13%, while the return for European and Asian shares was around 5% to 7%. And even though 2023 got off to a good start on the stock market floor, a shift seems to have taken place according to the above graphs. The starring role internationally is currently held by European and Asian equities, which looks very much like a trend reversal. In addition, we believe that the signal is strong enough to cause active investors to consider a reduction in US shares.
At Keytrade Bank, we have been working on this reduction in our Keyprivate portfolio management for a few months now.