The Great Rotation
We live in interesting times. The introduction of tariffs by the US Administration poses a key question as to how portfolios should be positioned at a time of heightened economic and geo-political uncertainty, when the world order may be in transition. No easy task. Humility is an undervalued characteristic at the best of times, but especially important when it comes to investment. In that vein, history offers some guidance and also reminds us that value is often a friend.
Risks and opportunities
If there was any doubt, ‘Liberation Day’ laid bare tariffs and not trade deals are the priority of the new US Administration even if, as seems very likely, they are a means to an end. Markets have fallen and economic growth forecasts are being reined in. Since World War II, globalisation has helped lift more people out of poverty than in any other period in history, yet it is on the ropes if not already floored. A 90-day stay of execution for tariffs exceeding 10% (except China) offers limited respite. Uncertainty prevails, including the extent to which trade negotiations can make progress in such a short time.
This has come at a time when markets were already beginning to question the ratings afforded many US stocks. Recent columns (Smaller companies are due their time in the sun, 21 February 2025 and Time for Europe, 22 March 2025) point to the danger of market concentration – Amazon, Apple, Meta, Microsoft and Nvidia recently accounting for c.19% of the MSCI World Index. No one doubts the potential of AI, but valuations still matter. Those of us long enough in the tooth can remember previous examples of concentration ending badly – with ‘reversion to mean’ eventually reasserting itself. It is very seldom ‘different this time’.
There is perhaps another consideration. We see a more factious world, not helped by the capacity of social media to encourage confrontation rather than kindness – and not reflecting the ‘silent majority’. We see the Rule of Law and perhaps democracy itself being brought into question in countries which should know better. Witness the deportation from the US of Kilmar Garcia to a maximum-security prison in El Salvador without any evidence of wrongdoing; the banning of Marine Le Pen from presidential office; and the extent extremist parties are entering the political mainstream in many European countries.
In such a world, a willingness to cooperate, political stability and the Rule of Law will become increasingly valued by markets, and more generally. Banana republics usually attract a market discount. And despite the focus on tariffs, more importantly we are witnessing a once-in-a-generation assault on the global economic and geopolitical order which has held sway since 1945. This is not helped by growing concerns about the US living beyond its means courtesy of growing debt levels. All grist to the mill for the ‘Great Rotation’ we are now witnessing away from US stocks.
Our portfolios have been underweight the US market for a while. This has hurt short-term performance. Yet, at a time the MSCI USA index still stands on a 40% premium to the rest of the world, we remain of the view better risk-adjusted returns exist elsewhere. The market focus on US mega caps, and exceptionalism in general, has shifted investor attention away from better-valued markets. While US stocks may rebound, history suggests they will probably continue to struggle against their global counterparts – as they did during the first decade of this century.
As investors begin to shift allocations elsewhere, the much-maligned UK market begins to stir – standing as it does at twice its average discount to the MSCI World index over the last 50 years. This perhaps reflects its focus on ‘old economy’ sectors such as financials and commodities. Yet there is a lot of bad news in the price at a time the UK’s relative attractions are increasing; particularly given the number of under-appreciated technology/data companies now listed on the market.
Meanwhile, the Prime Minister is right to progress talks with the US about a trade deal and not talk of retaliatory tariffs. Let other countries and the EU make that mistake, if they must. Two wrongs do not make a right. The mutual benefits of free trade did much to discredit the mercantilism that haunted the 1930s. Besides, in goods (which attract US tariffs) the UK runs a deficit, while in services (which do not) it is a major exporter. And a 10% tariff is better than the 20% tariff proposed for the EU. A trade deal would also not harm UK valuations.
All we need now is the Government to stop fiddling regarding pension reform and oblige our pension funds to hold more domestic equities. By way of comparison, a recent report on pension assets found that in 12 major economies the weighted average figure for domestic equities as a proportion of all equities is 26% – nearly double the level in the UK! The knock-on positives for the country and market would be enormous. I lobbied the previous Government about this, without success. The national interest must trump vested interests.
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