The flurry of executive orders from the White House has reminded investors that, if nothing else, this will be a noisy presidency. However, little clarity is yet available on the topics that matters most to investors – tariffs and the planned savings from the Department of Government Efficiency (DOGE). The outcome of these two factors could be crucial for investors in US markets over the coming months.
Tom Slater, manager of the Scottish Mortgage Investment trust, said: “If Trump’s tariffs are implemented in full, that would be highly inflationary. On the other hand, if the DOGE cuts $2trn off government spending, that will be highly deflationary. There are efforts in both directions, but trying to quantify the net effect is impossible.”
As a result, Slater admitted he has little idea on the likely impact of the incoming administration on individual companies or the stockmarket.
Johanna Kyrklund, group chief investment officer at Schroders, said the stockmarket remains vulnerable to shifts in bond pricing.
“Investors need to watch the US 10-year treasury. It’s settled back to 4.5%, which is fine, but if we see a more protracted rise towards 5%, that starts to create a valuation problem,” she said. “These populist policies boost nominal growth, which is good for equities, but you hit speed limits to that when the bond market starts to react against high levels of government debt and higher inflation. That’s a risk that’s further out this year.”
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This uncertainty wouldn’t necessarily be a problem were it not for the concentration of global markets on the US.
Kyrkland added: “The last time we were having these concerns over US exceptionalism was in the late 1990s and early 2000s. Then, there was a major valuation problem because the internet stocks had no earnings.
“This time, we look at the data and it’s not a valuation problem, it’s a concentration problem. The fact that they’re such a big part of the index. A passive exposure to MSCI World is no longer passive. It’s taking a view on seven stocks. It’s fine if you understand those stocks and you’re owning them deliberately.”
In the latest S&P 500 factsheet, the weighting to the top 10 holdings had ticked up to 37% – its highest level ever.
The risk is that investors are ‘accidentally’ taking a huge bet on the US and on the technology sector at a time when it might be entering a period of volatility. However, on the flip side, advisers may be concerned that a lower weighting to the US necessarily means weaker performance – and uncomfortable conversations with clients.
This isn’t necessarily the case. As it stands the well-known funds in the IA Mixed Investment 40-80% shares sector with the highest weighting to the US are the Fidelity Multi Asset income & Growth (72%), the Jupiter Merlin Income and Growth Select (66%), and the Vanguard LifeStrategy 60% Equity (60.1%) and 80% equity (62%) funds (data: Financial Express, to 24 January 2025).
Charles Stanley’s multi-asset growth fund also has a relatively high weighting, at 54%, as does Wise Multi-Asset Income (53%). That said, it is worth noting most of these funds are still underweight the MSCI World’s US weighting of 74%.
Financial Express data shows there is not necessarily a significant cross-over with the top performing funds. In other words, there are a number of funds that have managed to achieve high returns that have not relied on a high US weighting to do so. For example, the Orbis Global Balanced fund is the top-performing fund over three years, but currently only has a 36% weighting to the US.
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Other funds in this elite category include Invesco Global Balanced Index, Man Balanced Managed, M&G Episode Growth, Royal London GMAP Adventurous and BNP Mellon Multi-Asset Balanced. These are all top 20 performers in the sectors, but not among the highest 20 for US weighting. The only funds where there appears to be a significant cross-over between the US weighting and performance is for the Vanguard LifeStrategy range.
Kyrklund pointed out that there are plenty of companies across the world that are growing just as fast as the technology giants in the US but are not afforded the same valuations. They have been reallocating to Europe across their portfolios, for example.
An important area to watch will be the latest earnings season, which will show whether earnings growth is diversifying beyond the technology giants and into other markets. The utilities and financials sectors have seen the strongest upgrades from analysts ahead of companies’ reports.
This is not to say that the US will be a duff market in the year ahead. Slater at Scottish Mortgage pointed out that there has been a cultural shift in the US, that could remove some of the brakes on progress.
He added: “There has been a lurch to the right in Silicon Valley, which has been frustrated by the impact of DEI initiatives on productivity.”
The Jupiter Merlin team said the contrast between a new American government “full of vim, innovation, self-confidence and direction, and a rudderless insecure Europe mired in the glue of regulation, homogenising and pasteurising everything it touches, cannot be starker.”
It added: “Wade through the wanderings of his mind and see through the blizzard of Executive Orders being fired off in all directions this week, underneath is a brutally simple, crystal clear philosophy. Spelling it out from Trump 1.0: ‘A-M-E-R-I-C-A-F-I-R-S-T’; and now Trump 2.0, ‘MAKE-AMERICA-GREAT-AGAIN’.
“These are not mere electoral slogans; they are a complete ideology. Underpinning the foundations are his four rock solid pillars which drive everything he does: American competitiveness; the American worker; the American taxpayer; and his unequivocal and unembarrassed belief in America itself. Understand that, and the random pieces of the policy jigsaw all slot together remarkably easily, interconnecting into a complete picture.”
The problem is not that the US is going to be bad. It’s that the outcome is uncertain, and investors are likely to have relatively high weights there. A high weighting to the US hasn’t necessarily been a path to riches for multi-asset managers, and there are plenty of funds that have managed to perform with relatively low US holdings. Diversification remains good investment practice and could prove important in the year ahead.
