Money is starting to flow out of U.S. stocks and into a variety of overseas markets, a development that I’m referring to as the “Great Rebalancing.” This trend is likely to continue for years to come for three simple reasons:
1) Too much money is allocated to the American stock market compared to other global markets.
2) U.S. stocks are too expensive relative to overseas stocks.
3) Big investors are rebalancing to reduce risk because stormy U.S. domestic politics and rising geopolitical tensions mean “all eggs in one basket” is too risky.
We’ve already seen money flows result in massive gains just in 2024 and the past few months alone.
[text_ad]
To understand and capture this massive opportunity, you need to understand exactly what I mean by “too much money” in the American stock market.
Consider that the American population is about 4% of the world population and the U.S. economy makes up about 23% of the global economy.
So, you might rationally expect about 23% of global funds to be in American stocks.
But you also need to consider that the U.S. has some other less tangible factors, such as the world’s reserve currency, long-established trading alliances, military supremacy, and massive energy and agricultural capabilities.
Even still… what’s a reasonable allocation? Maybe 35% of global funds in U.S. stocks? That would account for some of those intangibles outside of GDP.
As of October 10, 2024, the actual share of global investment in U.S. stocks is 72%...
It’s a record-high investment ratio… and you have to think that if something can’t get much higher, it’s likely to move lower.
For some context, India now holds a 3% weighting, and China a 2% weighting.
So that is a 5% weighting for two of the world’s top five economies!
These two countries have a combined population of 2.6 billion people – eight times the U.S. population. And some emerging market countries like Vietnam are also growing five times faster than the American economy.
And it’s not as if U.S. stocks are inexpensive. The S&P 500 is selling for nearly 30x earnings and yielding a tiny average dividend of just 1.2%.
Over the past 20 years, trillions of dollars have moved into U.S. stocks from overseas investors.
Why? Well, for one, the U.S. has some of the best corporate governance and shareholder-friendly stock markets in the world.
Almost anyone in any country can access the NYSE or Nasdaq. That’s not necessarily true for every stock market.
Another reason so much capital is in U.S. stocks is simply because U.S. stocks have been in a strong uptrend.
Take a look at this 5-year chart comparing the S&P 500 to the Vanguard International Stock Fund (VTAIX):
U.S. stocks have outpaced global stocks by four to one in the last five years.
Over time, this kind of outperformance means that almost every global investor is going to be overweight U.S. stocks.
But this trend is now unwinding. The “Great Rebalancing” is already happening.
The big picture is that a 72% global allocation into one stock market is simply unsustainable.
Furthermore, American and global investors are looking to diversify their portfolios for some legitimate reasons beyond high stock valuations. Investors are also getting worried about damage to the U.S. brand of dynamic stability.
$35 Trillion and counting of U.S. national debt is spooking investors. We have added $14 trillion to the national debt in the last seven years. Unfortunately, both parties are big spenders.
But again, the major catalyst for U.S. investor capital flow to European, Asian, and Emerging Market stocks is the valuation gap.
You need to capture this gap to build wealth.
This is my goal as I travel through Europe, Asia and Latin America to seek new stock ideas for Cabot Explorer readers.
To learn more about what I discover, consider subscribing to Cabot Explorer today.
[author_ad]
