You're listening to Strictly Business Podcast with Lindsay Williams.
Since Donald J.
Trump was inaugurated as president, there's been a raft of executive orders
and policy changes covering all sorts of things,
internal politics, geopolitics, socioeconomic issues, tariffs, and so on.
There's been an unintended consequence, I think, when it comes to Mr.
Trump's intentions.
U.S.
market participants have been rattled by these changes.
With me is Philip Saunders.
director, Investment Institute at 91 in
London. I was looking at an FT post on LinkedIn the other day, Philip,
and there was a lot of MSCI index performance graphs.
And the US one was heading south,
and the other ones were either going sideways or going north, notably in
Europe.
Are you seeing people saying, wait a second, US asset classes have had their
day, and we should be looking elsewhere?
Well, I think it probably isn't quite as simple as that.
But it's clear that we've been through a period of US exceptionalism.
US assets have performed absolutely and relatively extremely well.
And a lot of other markets have, frankly, been disappointing.
I mean, if you look at the performance since COVID, for example, US equities,
even with the recent correction,
have trounced European equities and Chinese equities.
So I think that the issue is this, you know, how far can the elastic stretch?
Because, you know, part of it is justified because, you know,
clearly the U.S.
is probably the most shareholder friendly environment.
Productivity growth has been superior to other economies on a sustained basis.
And also index composition is different.
So part of the relative performance is a function of index composition.
So I don't think we should get too carried away about this.
However, the relative valuation of U.S.
assets, you know, take the dollar as well, you know, has, you know,
did reach extraordinary levels sort of over the course of 2025, and particularly
after that,
after Trump was elected.
And so to some extent, you know, elastic stretches and then it contracts.
And we're in one of those contraction phases.
Whether that then turns into, you know, that we've seen the peak U.S.
exceptionalism and U.S.
assets basically now move into a sustained period of underperformance.
Well, really, the jury's probably out on that one, to be realistic.
You've sort of answered my next question, which was, is this just a blip?
Is this just a sort of market reallocation for a short term gain or loss,
whatever it is?
Or do you think that this trend may become entrenched, in other words,
the MSCI USA underperforming the Europe MSCI?
Sure.
So I think for the time being, I think that, you know, actually, you know, truth
be told, nobody knows.
But for the time being, it seems that, you know, it's not going to be a straight
line,
but it seems that sort of the cyclical environment.
probably favours it continuing for the time being.
And then we can decide at a later date whether it's basically much more
structural.
But for the time being, what's happened is that we came into this year with very,
very elevated expectations for US growth and US earnings, consequently,
on top of that.
And the policy volatility that's been introduced by Trump and the activity
of Doge.
in reducing spending in a very federal government spending in a very visible way
that
combined with a natural ebbing of economic growth which you can see in the employment
figures has
undermined these expectations coming into the year and
given the high valuations of US equities you know if you basically have anything
that casts doubt on
the deliverability of earnings expectations in double digits type levels,
then, you know,
there's a risk of a market setback or correction.
And that's exactly what we've seen.
On top of this, we've seen positioning, you know, again, pretty extreme,
everybody's loaded up with US assets, because US assets have outperformed for so
long, and people, it's been a momentum market,
and it's sucked more money into the into the leaders.
And, you know, conversely, the narrative for Europe was that Europe basically is
irredeemably unproductive.
troubled.
And Germany basically has significant structural problems.
Its Chinese customers are becoming competitors and all that kind of thing.
Europe's overregulated the whole story.
And there's a lot of truth in that.
But basically, positioning had got very, very light.
So a lot of this is just simply a positioning adjustment in the light of a
questioning.
of the relative growth prospects for, say, the EU and other economies and the US.
OK, so US assets.
Let's focus on equities, if we can.
Maybe a little bit overstretched when it comes to valuations, whichever valuation
you favour, price, earnings, whatever it is.
But European equities, underinvested in and a little bit lower.
So people are saying, well, this is a good excuse for us to redress the balance
somewhat.
That's the first point.
The second point is, do people like...
European unity, because you've got Sir Keir Starmer, the Prime Minister of the
United Kingdom, getting people together,
26 people on an online call and everything.
And do people like that?
Do they say, right, we're going to take on this Trump fellow?
Yeah, I don't think it's really about that.
And because a lot of that is just sort of posing.
There is something fundamental underneath it all.
And that is the fact that basically the...
The new prospective German Chancellor, Merz,
is pushing forward pretty rapidly to try and get the fiscal debt break taken off or
circumvented
in Germany.
And this is critical because Germany basically only has a debt to GDP ratio of
60%, whereas
France, it's over 100.
And so Germany is in a reasonably good, relatively speaking, reasonably good
fiscal position.
So the fact that Germany is moving to reflate on top of, you know,
obviously reductions in interest rates in the EU,
that is much more consequential than Keir Starmer trying to sort of lead Europe in
its sort of opposition to
both Trump and also Russia.
All right.
So you've had a look at the graphs I described in my introduction.
You've said to yourself, OK, a perfectly natural readjustment in the short term.
term, you don't, from what I can gather, think that this is a medium and long-term
readjustment.
So I think that, you know, there is a case for that being so.
And I think that, you know, because all things go in these long cycles, you know,
we probably pass peak US exceptionalism,
but it's not a sort of straight line.
Okay.
So if you like, back in the day, these tend to map with dollar cycles, you know,
cycles of dollar strength.
So in the 1980s, you saw the Reagan period, and that was another phase of U.S.
exceptionalism.
And that peaked in 1985 with the dollar trading at astronomical levels relative to
the Deutschmark then.
And then there's been a subsequent phase which sort of petered out before the
global financial crisis.
So, you know, they tend to sort of be cycles.
And so we may well be entering a different cycle whereby American exceptionalism is
less.
However, I think that there are a number of things that, you know,
the Trump administration is taking some risks with the economy here in order to
actually achieve
fiscal sustainability.
And if they succeed in doing that,
it's arguably worth taking a bit of pain in the short term and in order to actually
put the.
US economy on a sort of firmer footing.
So to write the US economy off, I think is wrong.
But clearly, valuations are elevated.
And if you look at actually forward, 12 month forward PE multiples, you know, it's
actually been fairly modest.
The US is trading at something just over 20 times 12 months forward earnings.
Germany is on 14.8.
The UK is 12.2.
And China is 12.
So there is still a very significant gap.
and that will not fully close, I don't believe, but there's clearly scope for it
to sort of normalise from where we are at the
moment.
OK, let's go from equities now.
Final question.
US bonds, German bonds and the euro-dollar exchange rate.
I mean, the euro-dollar exchange rate is terribly, terribly important when you've
got two massive trading blocks.
Is it important that the US dollar has weakened so significantly against the
euro?
and is it terribly important that the German Bund yields have been rising
because as many people say simplistically because they want to
spend so much on military stuff.
Yeah, well, I think we can debate whether or not the productivity impact of spending
on defence is
worth it, but it's happening.
And European industry needs a catalyst,
because basically the Chinese are now extremely competitive in many areas that
Germany particularly used to dominate.
And energy costs, because of the sort of green initiatives, have...
have become very significant.
So in many senses, basic Germany has become less competitive as a result of
that.
And so, you know, defence spending is sort of classic industrial spending.
And, you know, that has pretty significant multiplier effects, at least in the sort
of short to medium term.
So I think that is potentially a bit of a game changer for Europe.
And it means that, you know, a recovery that, you know, is showing signs of coming
through it.
at any rate, ends up basically getting a sort of fiscal shot in the arm as well.
And so that means that the growth trajectory in Europe, you know,
whilst not spectacular on a sort of medium to longer term basis, at least on a
cyclical horizon, you know,
looks significantly better than it looked, say, sort of six to 12 months ago.
And that is significant because it's coming at a time when U.S. growth
expectations, having been very robust,
are actually being revised down.
So that relative position,
relative market performance tends to be pretty sensitive to that, particularly if
it's backed up by positioning differences, which we believe it is.
I said that was the final question, but it wasn't the final question because I want
to know if 91 has changed its position slightly,
even the smallest little tweak, Philip.
Yeah, so we, in...
our sort of outlook piece that we discussed earlier on in January,
we made the case that it was time to be moving away from this excessive
bias towards US assets.
And timing is always difficult, but by and large,
you'd have too much concentration and the relative valuation differentials were just
simply too high,
at least on a medium term basis.
Now, the Trump effect obviously sort of continued this sort of, you know,
continued this relative outperformance up until relatively recently.
But that now seems to be seems to have turned.
And I think that turn is turn is it.
So having more diversified portfolios, reducing dollar exposure, reducing U.S.
equity exposure, which, of course, is being as the U.S.
outperformed.
something like the MSCA Global Index, Equity Index,
the allocation to the US becomes higher and higher.
And back in the 1980s, I mean, Japanese equities got up to something like
45% of the global index, which of course was ridiculous.
Now, obviously, depending on which index you look at, you know,
US equity allocations sort of get up into the sort of 65 plus.
percent mark, which of course is, you know,
really doesn't make sense in terms of so more diversified approach at these kind of
relative valuation levels
made a lot of sense to us.
And it's better to be too early than too late.
Always.
Philip, thank you very much for your analysis.
Philip Saunders is Director, Investment Institute at 91 in London.
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