Global Equity: Is US exceptionalism over?

Rebalancing of the market

The term ‘US exceptionalism’ has always been somewhat contentious to us. We saw US equities outperform the rest of the world for a significant period of time, but a large part of that was in fact driven by the ‘magnificent seven’ technology giants. It has been our view for some time that it was unsustainable for one portion of the market to be narrowly leading it so much, and we expected the market to rebalance somewhat. That is exactly what we have started to see.

Instead of perceiving it as the end of US exceptionalism, we believe we are witnessing a market that previously experienced robust but narrow growth now normalising and rebalancing, with Europe having taken the reins earlier this year. We have maintained this view for a long time and, as such, have an overweight position in Europe. We hold a number of businesses listed in the UK and Europe with global exposure, where the ratings have been substantially more attractive than for their US counterparts. We have always recognised that there has been a valuation gap, but the actual fundamentals of the businesses have been as strong, given the similar global exposure. Therefore, while there has been some normalisation of valuations, in terms of the businesses that are performing well, our view has not changed.

Long-term effects of US tariffs on global equities

It would be unrealistic to assume there will be no impact at all from US tariffs. We may have passed the peak tariff period in terms of headlines, but tariffs are not going to disappear, and there will naturally be consequences. The most detrimental effect is likely to be on the consumer. We are coming out of a long period of high inflation, and the consumer’s ability to tolerate further price increases is increasingly difficult.

However, the impacts might not be as extreme as the market anticipates. In 2020, during the Covid pandemic, supply chains were a lot more concentrated. Over the last five years, companies have diversified supply chains, learning from that outlier event that relying solely on China, while economically attractive for short-term profitability, is not necessarily sustainable. Diversified supply chains should make it easier to digest tariffs on a global basis. In the short term, the US is likely to see the biggest impact from the inflationary effects of tariffs.

In the short term, the US is likely to see the biggest impact from the inflationary effects of tariffs.

Sector views

Consumer: We are incrementally more cautious about the consumer sector for the reasons mentioned above, and valuations have already come down a reasonable amount to reflect that. Historically, this has been an area that has been defensive in nature, comprising stocks we have wanted to own in more difficult environments; however, given the current backdrop, we are increasingly cautious. Nevertheless, we take a bottom-up approach to our stock picking, looking for idiosyncratic drivers that build an investment case. We still see some opportunities within the consumer space, but, overall, we are being more selective.

Industrials: This remains an area of interest. It is a broad sector, particularly in Europe, where we hope to see increased fiscal and energy spending, which should support growth. Many companies we own have managed to execute on and improve their business models, but we have not seen that macro tailwind come through. If it does, it could be a particularly interesting space for us, with very reasonable valuations.

Artificial intelligence (AI) and tech: Valuations had become quite stretched in this area, but over the long term, AI is not going away; the demand drivers remain. In recent years, many companies have ridden the AI wave, but now only the best companies with durable business models are going to succeed, leading to further bifurcation between AI players. We have seen this play out with some of the ‘magnificent seven’ demonstrating continued growth and resilience.

Health care: This is an overweight sector for us. The sector remains vulnerable to pricing headlines and potential future tariffs. However, there are opportunities where the product cycle, driven by past investments in innovation, is strong enough to withstand negative impacts from tariffs. We see opportunities as these stocks sell off on headlines, making them appealing for the long term.

In recent years, many companies have ridden the AI wave, but now only the best companies with durable business models are going to succeed, leading to further bifurcation between AI players.

Key opportunities

The market is incredibly volatile at the moment, with trades heavily influenced by macro headlines. This reminds us of the importance of focusing on the fundamentals and long-term drivers of companies, where we find opportunities and short-term imbalances.

We tend to focus on ideas where stocks are being punished for being in sectors seen as vulnerable to tariffs, but where we have a different view to consensus or where there have been market reactions that we think are unjustified. In the consumer space, there could be opportunities where companies sell products that consumers really want or need.

In terms of China, we have closed our underweight position. It is still a reasonably small part of the benchmark, so we are not going all-in, but are cognisant of the increased stimulus. The consumer and economy are struggling, and most of that now looks to be reflected in valuations. We are therefore finding select opportunities to close the underweight and hopefully participate in any recovery.

Volatile markets create opportunities for us, but we stick to our long-term process of finding companies with strong fundamentals. We remain consistent in our approach, investing in companies with flexibility, adaptability and growth, based on long-term trends that are durable and visible. This provides us with the confidence that the stocks we hold can withstand turbulence.

Authors

Louise Kernohan

Head of Global Opportunities

Georgina Gregory

Portfolio manager, Global Opportunities team