Produced in partnership with Orbis Investment Management.
US equities have delivered around 14-15 per cent annualised for over a decade, significantly outperforming other countries.
This stellar outperformance has resulted in the US making up around 65 per cent of the MSCI All Country World Index, which spans 23 developed markets and 24 emerging markets.
While investors have benefited from the dominance of the US market, valuations are at record highs, bringing into question the sustainability of returns and causing investors to consider other markets where valuations are not as stretched, according to Orbis Investment Management investment specialist Eric Marais.
“Of that 14 per cent, roughly speaking, half – so let’s call it 7 per cent – has come from [the] dividend yield and revenue growth of US businesses, which I would consider to be pretty sustainable sources of return,” he told Professional Planner.
“The other 7 per cent has come from two things: multiple expansion and margin expansion of the underlying businesses, and those two feel far less sustainable as forward-looking sources of return.
“If you expect that to continue, it means that you expect margins to go from already record highs to just continue marching higher…and that feels overly optimistic to me, as a base case assumption.”
Arguably, the most obvious examples of stretched valuations can be seen in US mega-cap technology space, where companies like Apple have PE multiples north of 30x.
This situation means investors need to be more intentional about avoiding specific companies and sectors and also gaining adequate diversification.
“Multiples have expanded a fair bit, so I think it’s a market where it’s less about identifying specific pockets that look very interesting compared to others and it’s more about being quite intentional about the areas of the market that you’re avoiding because there’s one pocket of the market that looks quite stretched,” Marais said.
Notwithstanding the incredible amount of interest and demand for AI, mega cap technology stocks are an area that Orbis is cautious of, with some questioning if consumers will pay a fair price for AI services, given the “absolutely astronomical” capital expenditure required to maintain systems.
“We have access to pretty decent AI tools that we can at least experiment with and, to a large extent, a lot of that is free or comes at a fairly minimal cost, however, actually running these AI queries and giving you a response, depending on the model, can be quite expensive,” he said.
“We’re in this phase…where the venture [capital] ecosystem is subsidising the end use of these products and we’re not paying full freight.
“It remains to be seen whether, at full freight, at full price, what the demand would look like.”
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