My general macro view hasn’t really changed from what I wrote last week (which is here if that is what you are after). Instead, I thought I’d start with one observation on the US election. This time round betting markets (and bond and equity market moves pre-election) were more “right” than polls. Betting markets were showing roughly a 2-1 chance Trump would win whereas the polls showed a more or less 50-50 tied race. I am normally more interested in markets (where people are putting real money at risk) than surveys. But also there are polling errors and I am always suspicious of people rigging betting markets (which are still small) to create the image that their candidate is the favourite and therefore give them some momentum.
So, given outcomes were uncertain, were the betting markets actually right? One way of thinking about this is that is by looking at the results of many such elections. If prediction markets are right, a candidate with a 20% probability should win around 20% of the time. Helpfully, Maxim Lott at ElectionBettingOdds.com has run the numbers on 805 elections and compared pre-election odds to the actual outcomes. The results look pretty good to me:
My takeaway from this is that I will be following the betting markets much more closely next time round than the poll results.
The other implication here is that if Trump has a 2/3rds chance of winning then you should see around 1/3rd of the market move after the result is announced. I feel we did see something like this with the post-election moves in the US dollar and US equities (which are now over 10% ahead of UK equities for the quarter as I write). But this now just adds to the conundrum of buying a US market at all-time highs, on a wave of euphoria at an eye-popping 23 times earnings. The valuation challenge is summarised here (and note these numbers were run before the US post-election surge).
But I started this note with the observation that markets are often pretty rational (and got Trump right). If you want to understand the reason for the US exceptionalism you see above the answer, I think, is here:
As an equity investor you are investing in the profits a company makes. If these profits don’t grow then you don’t normally make a whole lot of money. And note, the earnings you see there are in local currency (so sterling for the UK All-Share, US dollars for the US). If you convert them into a common currency (the US dollar say) then the picture looks even worse for non-US markets as the dollar has got a lot stronger over this period. Investors are paying up for better growth prospects in the US. They may well be paying too much but I understand the logic.
Simplistically, the chart above also shows the victory of the new economy (US software and technology companies) over the old. And I am not sure why this is going to change much in 2025. As an example, here are car sales for three of the largest foreign car manufacturers in China. New Chinese-made EVs are of a similar (or better) quality and a lot cheaper. As BYD and the like grow their international presence it is hard to get too excited about the profit growth at European car manufacturers (which employ around 7% of the Eurozone workforce).
For a long time we have owned a barbell approach where we own a fair-share of (expensive looking) US based winners balanced with value opportunities where we see them (most obviously in the UK and most recently in China). This approach has, I think, broadly worked (even though with hindsight we probably should have had it all in the US). Looking at markets today, I don’t see much reason to change it.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.