Written by Cormac Nevin
Markets endured a broad-based sell-off last week, with the MSCI All Country World Index of global equities returning -1.7% in GBP terms. The sell-off was concentrated in the US market in general, and large-cap US technology names in particular. The UK market was a source of stability in equities, rallying +0.2%, while global investment grade bonds also returned a positive +0.1% in GBP hedged terms. What has been unique about the challenges faced by the US equity market this year has been that it has been accompanied by a concurrent weakening in the US Dollar, meaning losses are exacerbated for GBP investors. This is relatively unusual in recent years, as we often see the US Dollar rallying in times of stress.
One interesting aspect of markets this year has been that the second coming of a President initially viewed as good for US stocks (and capital markets more broadly) appears to be driving international investors away from these assets as he re-aligns global relationships at a far deeper and faster pace than his first presidency. Investment in US assets by default has, over recent decades, become almost hard-wired into everything from global capital markets to personal investment plans. Today this is overwhelmingly done via the unthinking and very basic algorithm that is “passive” investment. If we look at one of the most popular LifeStrategy ranges in the UK, running £43bn in assets, they unthinkingly default 52% of every Pound they receive for equity allocation to the US market (in their range for European investors it is as high as 64%). This is also done blindly at market cap weights, meaning exposures are now very concentrated in large-cap tech stocks -an interesting outcome for products that are marketed as diversified investment solutions!
Governments in the UK, Europe and across the globe are increasingly keen to see those mechanical investment flows stay within their borders and indeed employed to fund re-armament or other infrastructure projects at home. One of the most consequential (if unintended) tariffs Trump enacts might be one on the US stock market. While the US equity market has been a fantastic source of returns for investors in recent decades, we think that a broad-based investment allocation framework remains very well suited to realising investment goals in the current climate.
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