Many investors believe that the American stock market has fared significantly better than the rest of the world over the past decade because of the fairytale price development of superstar companies in the technology sector. But that’s not even half the story. Two analyzes reveal the real reasons for the relative strength of US stocks.
US EQUITIES: ARE SUPERSTAR FIRMS REALLY PULLING THE MARKET?
Many market observers attribute this development to two main factors: The US dollar gained against most other currencies. From the perspective of investors, that increased the returns on American stocks. Investors attribute a far greater effect to the fairytale price development of many American technology stocks. Many investors believe that the run on Apple, Google, Facebook and other superstar companies from the high-tech sector and the higher weighting of technology stocks in the US country indices caused the huge difference in returns.
CHANGES IN EXCHANGE RATES HAD NO SIGNIFICANT EFFECT
According to his analysis, the difference in returns between the USA and the rest of the world measured by the MSCI All Country World Index (MSCI ACWI) ex USA from April 2009 to the end of December 2019 was exactly 7.1 percentage points. Only 0.72 percentage points of this can be explained by changes in exchange rates. The different weighting of individual sectors such as information technology, finance and health only plays a subordinate role. Much more decisive is the composition of the sectors , i.e. the selection of individual stocks, which can differ significantly between individual country and regional indices.
In the technology sector, for example, Microsoft and IBM were two of the biggest players in the US in 2009. In the rest of the world, Nokia and Samsung dominated. The business areas of these companies differ fundamentally, however, as does the management, which ultimately leads to different price developments.
WHY ARE US COMPANIES MAKING MORE PROFITS?
The question that remains open in the study is why US companies achieved higher profits than companies in other countries. And according to investors, analysts, the cause is a decline in competition in most US markets. For example, broadband internet access in the USA is on average more than twice as expensive as in South Korea and around 85 percent more than in Germany and France. He sees the reason for the lack of competition in the United States. Once the US was the cradle of deregulation and free markets. However, the economist observed that competition has decreased significantly in the past two decades. The land of opportunity no longer lives up to its reputation. If the competition decreases, the remaining companies have a higher price-setting power in a market, which they also use. In other words: the less the competition, the more abundant the (oligopoly) profits of the companies – to the detriment of the customers.
LOBBYING UNDERMINES COMPETITION
American markets with a large amount of data. He identified the cause of this development as the increasing lobbying of the large corporations, which exert growing influence on competition authorities, regulators and politics. In another countries, usually the competition and regulatory authorities are more independent than in the USA. This is because of the fact that the individual member states want to prevent a single state from gaining advantages by all means. That leads to strong institutions that are not so easy to instrumentalize.
FAIR VALUE RECOMMENDATIONS
Historically, phases in which US stocks delivered higher returns than the rest of the world were repeatedly followed by periods in which the reverse was true. From the American perspective, the question is not whether foreign stocks will make their comeback. But if a lack of competition in the US is the cause of much higher corporate earnings growth, this fundamental advantage will not go away overnight. In this respect, only a speculative run on European stocks could mean that they will overtake US stocks in the coming years. Nobody knows whether this will happen. Investors are therefore well advised to stick to a diversified portfolio strategy with a not too small proportion of US stocks. Anyone who thinks that US stocks will perform better than European stocks and the emerging markets in the future should weight their portfolio according to market capitalization . All others can orientate themselves on the economic performance. This leads to a lower proportion of US stocks in the portfolio.