Welcome to America the Uninvestible.
That seems like an odd statement about the one stop shop for investors around the world that offers the world’s largest companies, the most liquid markets and the rule of law to protect shareholder returns. Government intervention should also be limited. The fact that US stocks have outperformed the rest of the world over the past decade certainly helped.
In fact, just last year we talked about China being uninvestable. Its zero-Covid policy had crushed economic growth. The government’s crackdown on tech companies like Alibaba Group Holding (Ticker: BABA) and Tencent Holdings (0700.Hong Kong) has angered investors towards the best-performing stocks in this market. And rising tensions between the US and China, including the possibility of Chinese stocks being delisted from US stock exchanges, made investing in the world’s second largest economy particularly difficult. That’s probably still the case for most Americans, and Chinese stocks now look better as a trade than as a long-term investment.
But for some international investors, especially those who have no interest in democracy and have money to burn, the US could start to be uninvestable. The US decision to freeze Russia’s dollar holdings and restrict Russian banks’ access to the Swift – Society for Worldwide Interbank Financial Telecommunication system made holding dollars riskier for any country that might find itself on the other side.
The current stalemate on the debt ceiling also increases the likelihood of a potential US default and could cost the country another AAA rating from one of the rating agencies, an own goal that serious nations should not take.
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Government interference is no longer just for China, either. Florida Gov. Ron DeSantis targeted Disney World’s sweet deals because Walt Disney (DIS) was too “awake,” while California halted a $54 million deal with Walgreens Boots Alliance (WBA) after the company had announced that it would not offer abortion drugs in 21 states and had threatened to sue. Tech giants like Apple (AAPL), Alphabet (GOOGL) and Meta Platforms (META) are getting it from left and right on antitrust issues and freedom of speech. It may be less centralized — and more haphazard — than China’s tight controls, but it certainly must be rubbing investors in the wrong direction.
The last blow should have come from Switzerland of all places. With Credit Suisse Group (CS) under pressure, the Swiss government orchestrated its takeover by UBS Group (UBS) for $3.3 billion worth of shares. However, the bailout wiped out unsecured debt holders known as AT1s, even as equity holders were allowed to get away with something. You don’t have to have a degree in economics to know that this isn’t supposed to be the case. At the same time, the merger was pushed through, again circumventing the rules, without a shareholder vote. Well, Switzerland isn’t the US – and Europe has protested the bond wipe – but it does raise the question of how far Western regulators will go in a crisis.
“[I]If Western economies no longer treat property rights as sacrosanct, why should capital continue to flow from the ‘Greater South’ to the ‘United West’?” writes Louis-Vincent Gave, CEO of research firm Gavekal.
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Maybe it won’t. In January, foreign investors sold $36.6 billion worth of U.S. Treasuries, the fourth month of outflows in the last five, according to Citigroup data. And while the actual dollar amount has risen 6.8% since the end of 2019, the percentage of U.S. Treasuries held by foreigners has fallen to 29.3% from 39.2% at the end of 2019.
Gold has been a beneficiary — central banks bought about $70 billion, or 1,136 tons of gold, in 2022, according to the World Gold Council — and it’s one that investors in or outside the US should be looking at. Gold had a great start to the year with the
SPDR Gold Stocks
The exchange-traded fund (GLD) is up 9.5% so far in 2023. This reflects lower bond yields, the possibility that the Federal Reserve is nearing the end of its rate hikes, and risk-off sentiment since the Silicon Valley bank collapse. As long as investors don’t get too comfortable, gold could keep going higher.
It may also be time for US investors to look overseas for equities. In the last 10 years – the There Is No Alternative era – the
SPDR S&P 500
ETF (SPY) returned 12% including dividends reinvested, slightly beating the
Vanguard FTSE All-World ex-US
ETF (VEU), which returned just 4.1%. That could change. Matthew Poterba, senior analyst at Richard Bernstein Advisors, notes that global and US equities tend to move in long cycles of outperformance and underperformance – and the cycle may shift away from the US. That’s in large part because the rest of the world has lower exposure to technology and tech-related sectors, which tend to do better when interest rates are low, money is easy, and growth stocks outperform.
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“Today’s macro fundamentals are the opposite,” explains Poterba. “If we’re correct that inflation and interest rates will stay elevated for longer, global markets’ sector exposure could help performance.”
There are nicer places than home.
write to Ben Levisohn at [email protected]
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