Will the bull run charge on?

Key Concepts

• Portfolio Resilience: The ability of an investment portfolio to withstand market downturns and maintain its value.
• Diversified Earnings: Income generated from various sources and geographical regions, reducing reliance on any single market.
• Market Structure: The composition and characteristics of a stock market, including the types of companies and sectors it comprises.
• Cyclical Financials: Financial companies whose performance is closely tied to the economic cycle.
• GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
• Ceasefire: An agreement between opposing parties to stop fighting.
• Corporate Reform: Changes made by companies to improve their governance, efficiency, and shareholder value.
• Shareholder Friendly: Practices that benefit shareholders, such as dividend payouts and share buybacks.
• Bank of Japan (BOJ): The central bank of Japan, responsible for monetary policy.
• Currency Cycles: Long-term trends in the value of one currency relative to another.
• Second Derivative: In finance, this refers to the rate of change of a trend, which can be more significant than the absolute level.
• AI (Artificial Intelligence): A field of computer science focused on creating intelligent machines that can perform tasks typically requiring human intelligence.
• Earnings Season: A period when publicly traded companies release their financial results for a specific quarter or year.

Non-US Investment for Portfolio Resilience and Long-Term Outcomes

Reinhard Root, global equity portfolio manager at 91, discusses the benefits of increasing non-US investment to enhance portfolio resilience and long-term outcomes, especially with US markets closed for a holiday.

Diversified Earnings and Market Structures

• US Market Dominance: The US market has seen significant dominance for years, largely driven by the strong performance of big tech companies and their superior earnings growth compared to the broader market.
• Exposure Outside the US: Investing outside the US offers access to different types of exposures and market structures.
  • Europe: Characterized by a higher proportion of energy, materials, industrials, and cyclical financials.
  • Emerging Markets: Offer greater exposure to higher-growth consumer segments.
• Core Rationale for Non-US Investment: The primary driver for investing outside the US is access to diversified earnings and different streams of income. However, these earnings must keep pace with US performance, explaining the US market's relative strength until recently.

European Markets: Banks and Industrials

• Interest in European Banks and Industrials: Root expresses interest in these sectors within Europe.
• Ukraine-Russia Conflict: While acknowledging the daily evolving nature of the conflict, Root suggests that a ceasefire appears likely in the near term.
• Long-Term European Outlook:
  • Increased Defense Spending: Europe has recognized the need to increase GDP spending on defense, a trend Root believes will persist and potentially increase over the multi-year horizon.
  • Buying Opportunity: The sell-off in related sectors, such as European defense, might present a good buying opportunity, even if a ceasefire occurs.

Japanese Markets: Inflation and Corporate Reform

• Key Change: Rise of Inflation: Japan is experiencing a rise in inflation after a prolonged period of deflation. This presents opportunities for companies to pass on price increases for the first time.
• Corporate Reform: Japanese corporations, historically conservatively managed and holding significant cash reserves, are becoming more shareholder-friendly by redistributing cash to shareholders.
• Bank of Japan (BOJ) Rate Increases:
  • Behind the Curve: The BOJ appears to be somewhat behind the curve in terms of monetary policy, which may explain some of the currency weakness.
  • Measured Approach: Rate increases are expected and are being implemented in a measured way, allowing consumers and businesses time to adjust to a higher interest rate environment.

US Dollar Weakening and Currency Cycles

• Currency Shifts: Currency shifts, once they begin, tend to last for a considerable period, often spanning multiple years.
• End of US Dollar Bull Market: The US has likely just exited a multi-year US dollar bull market.
• Future Dollar Outlook: While not predicting rapid depreciation, Root believes there is a case for a less strong US dollar cycle compared to the past.
• Importance of Rate of Change: In markets, the "second derivative" (rate of change) is often more significant than the absolute level. This explains why investors are looking beyond the US for potential revenue growth and currency tailwinds from a less dominant US dollar.

US Markets Heading into the New Year

• Strong Year for US Markets: The US market has had a strong year with robust returns.
• Market Structure Influence: The significant weighting of big tech and AI beneficiaries in the US market has contributed to its performance.
• Resilient Corporate Profit Growth: The view is that corporate profit growth remains resilient, with earnings season showing solid results, more companies beating than missing expectations.
• Optimism for Year-End: There is a reasonable level of optimism for the US market heading into the year-end.

Conclusion

Reinhard Root emphasizes that diversifying investments beyond the US is crucial for building portfolio resilience and achieving better long-term outcomes. This diversification provides access to different earnings streams and market structures. While the US market has been strong, factors like increased European defense spending, the emergence of inflation and corporate reform in Japan, and a potential shift in the US dollar cycle present compelling opportunities outside of North America. Despite the US market's strong performance, the outlook for corporate profits remains positive, suggesting a balanced approach to global investing is advisable.