Readers will know that serious investors do not shift their asset allocations around and trade in and out of funds frequently just because of a change in short term factors. In my training I suggest having a high level asset allocation target for each main investment sector that is of interest and relevant to your objectives and to then monitor, using some sort of recording system, how your actual portfolio compares with the targets.
This is not a strict science, but part of the ongoing process of diversification and risk control.
I remind you of this because I want to call your attention to what I see as being subtle changes in the thinking of the professional investment community on the relative value of North American versus European and UK markets.
I am not suggesting that you are likely to react by making major changes to your asset mix, but that you might find this helpful context in making those minor course corrections that keep the portfolio supertanker heading smoothly for its long term destination.
USA down, Euope and UK heading up?
A very simple take-away is that there is a recurring observation that interest rates might well come down sooner in Europe than in the USA (that’s quite new as an idea), that the UK is doing better than had been predicted and is now a refreshingly different place to invest than the Magnificent 7 led US market and that in fact the consumer in the US is struggling, whereas the equivalent potential spender in the UK or Europe has rather more ammunition in their locker.
Note that I am for this blog ignoring the Asia Pacific region. News from China is still not encouraging, and that is highly relevant for all those Asia Pacific funds with 30% plus in Chinese stocks, even after really poor performance. There will be a turnaround there and it will be a strong one, but even an unltra-contrarian like me is not betting on it yet.
Some detail
One of the reasons for being negative on the US is that out of the S&P500 stocks, recent performance has really only come from 5 or 6 shares, not even the full Mag 7. If you look at data for the other 494 stocks recently, it is weak. The presidential election polls show that the US voter is not rating Biden well in terms of economic performance and that is because there has been a widening of the gap between the relatively few doing very well economically in the US and the vast majority not doing so well at all.
Some specific factors that have seen the UK market underperform other global majors (as a market, because some specific stocks have done fine) is the very low sector exposure in the FTSE100 to technology, large numbers of share buy backs and a dearth of IPOs. Domestic demand for UK shares has also been reported as weak, possibly because there were such easily visible opportunities over in the US and the currency risk that might normally be relevant has been limited while the UK and US central banks have been in virtual lock-step on interest rate policy.
European major indices have a more technology weighted asset mix and we have the Novo Nordsisk weight loss drug phenomenom in Denmark, which has neen another one share influencer for a lot of European portfolios, together with ASML in Holland.
What that means is that as the US technology Titans are beginning to get rated as over-valued by a number of analysts, the UK market looks like a genuine diversifier.
Furthermore, as I have been saying for ages, quality UK companies are currently tasty takeover targets for US hedge funds that are stuffed with investors’ cash, making the mid-cap section of the FTSE indices look especially interesting.
Food for thought!
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