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Investment view

I hope I can be forgiven for largely ignoring the US presidential election as by now we will all know the result. The problem I face is that the outcome, as I write, is in the future. Does it matter?

Markets have been telling us that, whatever the result, life will go on much as before. The next few weeks will demonstrate how accurate markets have been in assessing the lack of importance of who wins.

Of course, how the world’s biggest economy is run is something any investor should be following closely. The reality is that whoever holds the keys to the Oval Office will be inheriting a set of problems that cannot be solved overnight. Not the least important of these is the big deficit that the US is running on both its current and trade accounts. Eradicating these may take more than the four-year term afforded to the new president.

The US is the biggest stockmarket in the world. Aside from a brief period at the end of the 1980s, when Japan stole this title as the Tokyo index soared to what proved to be unsustainable heights, it has enjoyed this status for longer than anyone can remember. Quite right too. A big economy demands a big stockmarket. But is the dominance of the US now in an irreversible decline?

Certainly, the 1990s proved to be golden years for the world’s last remaining superpower. By embracing new technologies, the US secured powerful advantages over competitor nations. The stockmarket outperformed other major markets comprehensively during the decade and a strong dollar helped deliver spectacular returns to foreign investors. Not everyone took advantage of this opportunity, though.

If the true value of the US market had been reflected in every global mandate, then more than 50 per cent of the equity portion would need to have been invested in US stocks. In reality, the US did not always feature hugely in UK-run portfolios, even when an international approach was being taken. This was very damaging to portfolio performance during the 1990s. It was fashionable to be overweight in the Far East during the early years of that decade but 1998 brought about a reversal of fortunes that made managers reassess how they structured their international portfolios. Sadly, this produced a rush of money into the US and, in particular, into technology issues at precisely the wrong moment.

The game has certainly changed today. The dollar is in decline and tough economic conditions have left the US equity market looking expensive and vulnerable to a correction. Yet, dollar weakness aside, the US indices have held up remarkably well, presumably buoyed up by domestic investors. The situation in the US seems unlikely to change dramatically, whoever is now destined for the White House. What investment advisers must consider is how important a role the US should play in portfolio construction in the future.

Popular wisdom again has it that it is the Far East that will be making the running in the future. The arguments are powerful – you only have to look at the economic progress being made in China and India. The risks inherent in investing in the other side of the world are considerable, however. Corporate governance is less rigorous in many of these countries and, for private investors, costs can be considerable.

The reality for investors today is that globalisation has created a situation whereby even sticking to our domestic market will mean that investors have exposure all around the globe. International diversification has arrived through the way in which our corporations are structured. You can achieve a geographic spread of interest simply by investing in FTSE 100 stocks.

Plenty of models exist now that adopt see-through strategies so that the real international exposure can be determined. It seems certain to make portfolio construction very different in the future. Being overweight in the US – or even reflecting in portfolios the sheer size of the US market – does not look a particularly clever thing to do at present.

There are cheaper markets available and we will have plenty of time to judge how the incoming administration is dealing with the considerable problems inherent in the US economy. Keeping closer to home may pay for the present.


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