Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. 

Over recent years, the key to successful stock picking has been simple: buy US shares. The past decade coincided with the longest bull market in history, and US stock markets were its prime beneficiaries. 

You’d have every reason to assume that, barring 2020’s temporary blip, normal business now resumes. The US will continue to lead the way, while the UK struggles to keep apace.  

Maybe not. While the UK should rebound impressively this year - the Bank of England has forecast the UK’s strongest level of growth this year since World War II, the highest among G7 countries - a few worries linger around US shares.  

The first is their price. US stocks are currently trading at around 23 times earnings and yielding around 1.5%. UK stocks, meanwhile, are significantly cheaper at around 14 times earnings and a 4.1% yield, which looks more secure now after last year’s dividend cuts. 

It’s tough to make predictions for long-term returns based on valuations, but it’s a statement of fact that if you buy a stock when it’s expensive, you’re likely to make less money. Valuations are high - by some metrics, they’ve only been higher in 1929 and 2000 - and while shares could well continue to climb, there’s good reason here to stop and think. 

Some will justify today’s valuations by pointing to ultra-low interest rates and US Federal Reserve support. While they both can help, neither will be around for ever. The mere mention of rising rates was enough to send jitters through markets earlier this month.  

The situation is heightened in the US by the sheer size of fiscal and monetary support, which far surpassed our own. While certainly helping to buoy markets, they also leave the door open to higher inflation in the States than we’re likely to see here.

Corporate earnings reports are also struggling to make sense of valuations. The recent corporate earnings season well surpassed analysts’ expectations but not the market’s, judging by muted share price movements. When news that it’s enjoyed its best start to a year fails to enthuse Apple investors, you wonder what more the company can do. 

The weight on Apple’s shoulders, as well as Facebook, Amazon, Microsoft and Alphabet, parent company of Google, is already large enough. Between them these five companies account for almost a quarter of the S&P 500. If they take a turn for the worse, it will knock the entire US market (and the countless international tracker funds which follow it).  

Clearly they’re not going anywhere soon, but the future for these companies is starting to look a little more uncertain. High-growth companies like these would fare worst in a more inflationary, higher rate environment. They’ve been the ones to suffer during recent bouts of volatility. Meanwhile, a flurry of antitrust hearings bubble away in the background. 

This is where the UK differs. Whereas the US could see much of its prized names suffer amid a new economic dawn, our own stock market should do much better. We’re far more exposed to the cyclical, “value” focused sectors like services and financials which suffered over 2020, but should do better in a reopened economy.  

That’s no secret, yet still the FTSE 100 remains some way below its pre-pandemic peak, while the US S&P 500 sailed past its own almost a year ago. If nothing else, the UK has some serious ground to make up just to get back to square one.  

Naturally, the best way to play both these stories is the most boring. For each of their shortcomings, exposure to both is most likely to deliver sustainable returns over the long-term.  

The US might look frothy, but a decade of outperformance is unlikely to reverse overnight. It remains a huge market with a wealth of opportunities. Biden’s infrastructure bills, in particular, could signal exciting opportunities.  

Meanwhile, there are risks associated with the UK. Home market bias has caught investors out in the past and left them wallowing in paltry returns here and missing out on exciting growth elsewhere.  

Remember too that each market can serve a different purpose. The UK may be more suited to income-seeking investors with its relatively high level of dividend payers, while the US has more to offer in the way of up-and-coming tech. 

If you’re looking for funds which invest in these regions, you can find nine UK-focused funds and five US-focused on our Select 50 choice of favourite investments.  

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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