Goldman Sachs chief U.S. equity strategist David Kostin estimates that investors have sold US$7-billion in U.S. equities so far this year and bought a remarkable US$56-billion in non-U.S. stocks. He believes that while pockets of investing opportunities are apparent in international markets, “over time, investors may regret this asset allocation decision.”
Mr. Kostin notes that U.S. markets have dramatically outperformed their global counterparts since 2000. The S&P 500′s average annual return of 7.2 per cent easily beat Japan and Europe’s 3.2 per cent mark and Asia ex-Japan’s 5.5 per cent. The S&P/TSX Composite’s 6.7 per cent annual returns was competitive for the period.
The sector composition of the S&P 500 goes a long way in explaining U.S. market outperformance. High flying technology stocks currently account for 28 per cent of the index, compared with seven per cent of the MSCI Europe Index, 14 per cent of the Topix and 20 per cent of the MSCI Asia ex-Japan Index.
The preponderance of technology in the U.S. stock market helps make it the most profitable in the world. The U.S. benchmark’s return on equity (ROE) of 20.4 per cent is well above Canada’s 11.1 per cent, Japan’s 8.4 per cent, Asia ex-Japan’s 9.7 per cent and Europe’s 11.8 per cent.
U.S. profitability has improved the most over the past decade. The S&P 500′s ROE has improved by 4.8 per cent, better than Europe’s 3.7 per cent, Japan’s 3.1 per cent and Canada’s 3.8 per cent. The ROE of Asia ex-Japan declined by 1.4 per cent.
U.S. stocks have become more expensive through 2023 and the current 19 times forward earnings is in the 95th percentile relative to history. This may limit returns in the years to come. American corporate management’s relentless focus on profitability, however, always makes it dangerous to drastically underweight U.S. stocks in your portfolio.
-- Scott Barlow, Globe and Mail market strategist
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Compiled by Globe Investor Staff