Why you shouldn’t turn your back on the US

This Fourth of July holiday investors are not short of reasons to make their portfolios more independent of American assets.

For some investors the US now seems a less stable, more unpredictable country, which is challenging for business (entrepreneurs become less inclined to take risks to build companies, consumers become less inclined to spend). 

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Developments in the US have also prompted investors to take more notice of prospects elsewhere. Europe’s institutional stability suddenly looks attractive and its need to spend more on defence is likely to provide an economic boost. China seems to be over the worst of its property crisis and is investing heavily in advanced sectors such as AI, electric cars and semiconductors.

Finally, there is the fact that American markets went into the second Trump presidency looking very fully valued. Some analysts expected a correction, or at least a break from the heady returns of recent years, anyway. Indeed, we could say that, for British savers at least, US assets were doubly overvalued: firstly because American stocks were highly priced relative to their earnings; secondly because they were denominated in an expensive-looking US dollar (one analyst said the dollar at the end of last year was ‘the most expensive asset on almost any measure’).

Against this background we should not be surprised that some investors have already voted with their feet: the flows of investment funds leaving the US more than doubled to nearly $87bn in the first half of this year relative to the same period last year, according to the London Stock Exchange’s Lipper Funds service.

Some geographical rebalancing of portfolios is entirely understandable, not least because the strong performance of America’s stock market and economy in recent years had led US shares to account for about 70% of global indices, which many private savers in effect own via tracker funds. But perhaps investors should be careful not to go from one extreme to the other and get out of America altogether. The US still has some potent advantages.

‘There remains a strong case to maintain an exposure to the US market,’ said Fidelity’s Tom Stevenson. ‘Its demographics are strong, with a still expanding workforce. Tax and regulation in America are favourable. It enjoys energy security. It has a large domestic market. The US economy is dynamic and innovative.’

He added: ‘US exceptionalism was built over decades; it will not disappear in a matter of months.’

America is home not just to a large number of world-class universities and Silicon Valley but to less well-known clusters of cutting-edge innovation such as the array of biotech companies around Boston. National spending on research and development, a key driver of economic growth, was 3.6% of economic output in 2022, the fourth highest percentage in the world, according to the most recent World Bank data (Britain’s figure, from a year earlier, was 2.9%). The technological prowess of American enterprise from the ‘Magnificent 7’ down is not in dispute (valuation may be another matter).

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Henk-Jan Rikkerink, a multi-asset fund manager at Fidelity, said: ‘There is still room in a diversified portfolio for US equities. The S&P 500 comprises many of the world’s biggest and most innovative companies, which are highly profitable and shareholder friendly. It would be unwise to bet against the US entirely; but equally it is not the only game in town.

‘Diversification has always been important: now it is imperative for portfolios that have become increasingly reliant on US assets over the past 25 years. Capital outflows and a dollar depreciation mean [global stock market] index weightings will look very different in the future. Those who get ahead of these structural trends may stand to benefit as portfolios rebalance.’

How far should your rebalancing go? We discussed this in a recent story, Tariff turmoil: what is the right exposure to the US?, where we pointed out that global indices that counteract America’s current dominance of global stock markets by being ‘equal weighted’ had something like 20-40% exposure to US shares.

There is a strong case for a well-diversified portfolio but there is plenty to say for retaining significant exposure to America.

If you want such a portfolio from a ‘one-stop-shop’ global fund, candidates from Fidelity’s Select 50 list of favoured funds, chosen by independent analysts, include Fidelity Global Dividend, which has 26% of its money in America, and Schroder Global Recovery (34% in the US).

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Important information - nvestors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.