Re-evaluation of Hefty Portfolio of U.S. Stocks
American Exceptionalism: A Debatable Concept with Financial Ramifications
The debates surrounding American Exceptionalism, the belief in the USA's unique historical and exceptional role, have dominated the sociopolitical sphere for decades. Economically, it's hard to deny the exceptional status of the USA in recent years, being the only major economy to grow at a rate above the trend. Despite this, the US stock market's dominance has caused unease among investors, with the "Magnificent Seven" tech giants accounting for nearly 30% of the S&P500.
Weak Performance and Looming Challenges
The relatively weak performance of US titles since the new government's inauguration might be the beginning of significant shifts in the financial markets. The resemblance of the economic program known as "Trumponomics" and the confrontational US negotiating policy could lead to a return to outdated trade political times. Instead of cooperation and partnership, it's a scenario of US isolationism and G-Zero, which negatively affects all involved. These shifts may prove detrimental to the US stock market.
Furthermore, the Trump administration's tampering with the status of the dollar as the world's leading currency is another cause for concern. Considerations such as the "Mar-a-Lago Accord," which combines monetary and security policy aspects, are systemically unsound.
Rethinking Weighting Schemes
Much speaks for strategically rethinking the overly high US stock weight in international standard indices. The advantage of a GDP weighting is that it's easy to determine, plausible, and already discussed in the bond area for a long time. An GDP weighting applied to the MSCI World Stock Index would decrease the USA's share from over 70 to around 50%.
However, focusing solely on a country's economic development may not accurately reflect its largest companies' success. Instead, profit-based weighting, which reflects a company's actual success and does not contain an expectation component, seems more appropriate. Rough calculations suggest that the U.S. share in the global stock index would decrease from the original 70% to around 40% with a profit-based weighting. This would provide opportunities for genuine diversification and significant conviction-based benchmark deviations in global portfolios.
Europe's Rising Tide
In the face of current turning points, investors should question traditional index weighting schemes. Profit-based weighting, if applied, represents a new dawn in Europe, with the potential for Europe to outperform the US stock markets for the first time in a long while, amidst the buzz of MEGA - Make Europe Great Again!
Ingo Mainert
CIO Core Multi Asset at Allianz Global Investors (AGI)
Additional Insights
Alternative weighting schemes in international stock indices, such as equal weighting or profit-based weighting, have both proponents and critics. These schemes can significantly impact the composition and performance of indices, potentially affecting the dominance of the US stock market.
Proponents of alternative weighting schemes argue for enhanced diversification, reduced concentration risk, and the potential for new opportunities for investors. On the other hand, critics claim that these schemes are complex, potentially misprice assets, and may not accurately represent the market’s conditions.
If implemented, alternative weighting schemes like profit-based weighting could diminish the dominance of the US stock market by encouraging global diversification, refocusing on small companies and emerging markets, and contributing to market stability.
- The debates around American Exceptionalism, coupled with the concerns over the US stock market's dominance and potential shifts due to the new government's economic program, suggest a need for rethinking the weight of US stocks in international standard indices.
- The US government's monetary and security policy measures, such as the Mar-a-Lago Accord, are causing concerns in the finance world, as they may adversely affect the status of the dollar as the world's leading currency and potentially lead to a diminished role for the US stock market.
- In light of the current economic landscape and the potential implementation of alternative weighting schemes in international stock indices, Europe might have an opportunity to outperform US stock markets, as these schemes could encourage global diversification and refocus attention on smaller companies and emerging markets.
