In times of volatility, investors have long sought ‘safe’ and ‘stable’ asset classes like gold and cash. While these assets remain popular, there is growing evidence that suggests investors are responding to risk by repositioning the weight and composition of their equities portfolio, rather than selling out of stocks altogether.
However, this shouldn’t come as a surprise to astute investors. With a combined valuation well over US$40 trillion, the NYSE and NASDAQ markets are the greatest growth opportunity of any markets in the world. Their collective market cap represents as much as half of all global stock markets, ensuring US shares remain alluring to investors from all corners of the globe.
It’s the very structure of the US stock market that makes it a lucrative investment opportunity, regardless of prevailing macroeconomic concerns. And from this, we can begin to understand why the market has maintained its strength through periods that some analysts would say defy the reality of a subdued global economic growth environment.
A drawcard for economic security and stable growth
Beyond its sheer size as a leading destination for capital investment, US markets have also been one of the best-performing capital markets across the world. Yet for all the exposure to growth, investors haven’t been required to take on higher risksthat would typically accompany, if not define, emerging markets.
The superior resilience of US markets, especially over the last decade, but even across a long-term horizon, remains more compelling than that of other markets, which have proven less stable and more volatile on account of local socioeconomic risks. And while investors may seek to reduce their market ‘exposure’ in a risk-off environment, this hasn’t necessarily meant deserting equities, more so, investing in companies supported by an economy with stable growth, like those in the US.
As economic growth continues to flounder in many parts of the world, including the likes of Europe, Australia, Japan and Hong Kong, plus uncertainty surrounds the real picture of economic growth in China, the US economy is defying all odds. Unemployment is sitting at multi-decade lows, wages are increasing, consumer spending is picking up, foreign trade is improving and investment is growing. While there are still areas of concern, notably manufacturing, an improving economic backdrop is as significant a tailwind as any market could hope for.
A highly-liquid and diverse index with large-caps offering reliable visibility
Repositioning an equities portfolio for risk often means mitigating exposure to highly volatile stocks. In many foreign markets, the composition of the index makes this more difficult as the size of the companies are smaller and often less liquid.
On the contrary, however, the US stock market is dominated by a wealth of large-cap stocks that provide investors significant liquidity, even when there is prevailing risk in the market. They also offer reliable growth and greater earnings visibility, something investors should seek out as means to manage risk.
In addition, the US market is home to niche sectors that are otherwise unavailable to investors from other regions. This includes technology developers, which have played a monumental role in leading the bull market, as well as conglomerates, biotechnology and pharmaceutical companies, plus aerospace and defence corporations.
In fact, some of the best-performing stocks during periods of investor anxiety have been from the aerospace and defence sector. When geopolitical tension rises, there is a significant flow of capital towards high-quality US stocks from this sector. Similarly, US markets have performed well in nearly every instance after a major epidemic, with biotechnology and pharmaceutical stocks among those doing well. Ultimately, broad opportunities and index diversity give investors reasons to be bullish about US markets, irrespective of what is going on in the broader macroeconomic environment.
Momentum that has made US stocks a destination for capital
One of the other key tailwinds driving US markets at the moment is the momentum that has been building for years. In every respect, the US market has become the ‘safe’ place to be, where the opportunity cost of not being in the market has proven to be significant.
We recently discussed that if you leave your capital in the bank, you are conceivably worse off once the real value of an increasing supply of cash is taken into account. This explains why the amount of cash assets held by fund managers relative to all other assets is at a multi-year low.
As the index continues to climb, market makers have followed suit, driving additional gains. It means that investors need to have exposure to the world’s leading market. However, at the same time, the law of supply and demand comes into the fold. And as it stands right now, a collective market valuation in excess of US$40 trillion still pales in comparison to available household liquid assetsacross the world, which are estimated to exceed US$300 trillion.
This sort of fundamental imbalance can only be a positive for a market with as strong a reputation as that of the US, and it’s no wonder that US equity fund inflows are at a multi-week high. Meanwhile, emerging market equity outflows have accelerated amid lingering concerns over the Coronavirus. It just goes to show that the US stock market is as much of a safe haven as gold and cash, and with such an abundance of investment opportunities, why shouldn’t it be?