The ancient Romans once claimed, “All roads lead to Rome,” reflecting their dominance over a significant part of the world. Since World War II, a similar notion has applied to global capital and financial markets, where all roads lead to New York City and Washington D.C.
Throughout much of the past decade, the US stock market, particularly the tech sector, has taken the lead globally. The US dollar has reigned supreme in the 24/7 global foreign exchange market, and over the last five years, the S&P 500 index (SPY) has outpaced the MSCI World Index (URTH) by an impressive 22.79%.
Even in 2024, the US market has outperformed global equities by 3.35% year-to-date. Many investors worldwide continue to favor international investments, particularly in US markets, over their domestic and local stock markets.
However, how much longer, given the world’s current evolutions, can US markets maintain their dominance and outperformance?
In the short term, concerns have arisen due to a weaker-than-expected US labor market, sparking fears of a recession. The Sahm rule—indicating a recession when the US unemployment rate’s three-month moving average rises by 0.5 percentage points over the previous 12 months—has become a reliable predictor, despite limited signs so far of an economic slowdown. With the US accounting for approximately 20% of global GDP and 16% of global consumption, fears of a downturn have rippled across world markets, affecting commodity prices.
Moreover, the upcoming November US elections could introduce unpredictable effects on both domestic and global economies. Global investors might find it prudent to consider the potential impact of ‘Trumponomics’ on Forex markets, Wall Street, sovereign debt, gold, crude oil, and copper.
If history serves as a guide, the themes emerging in the latter half of 2024 suggest that a ‘Trump 2.0’ scenario could lead to significant shifts in asset prices, geopolitics, and global money flows.
IN THE ‘REST OF THE WORLD’
Outside the USA, the planet continues to develop, challenging both the global dominance of the well-established financial markets and potentially reducing, or even potentially reversing, the performance gap between the US and global markets.
As Asian markets, in particular, continue to mature, they could become viable alternatives to US markets. Notably, Red China now boasts more publicly listed companies than the United States, “the land of the free.” This achievement is largely due to the rapid growth of China’s domestic markets and the establishment of new stock exchanges, such as the STAR Market, which focuses on technology and innovation-driven enterprises.
According to Bloomberg data, while the Malaysian market underperformed the USA market by -80% over the last five years, it began outperforming it in 2024. The trend, partly driven by Malaysian employees and pension funds allocating more capital to the domestic market, could be long-lasting.
It’s true that in South Korea, many investors still focus primarily, if not exclusively, on US markets. But this, too, could change over time, with banks and stock brokers launching campaigns like “Korea buys Korea” to encourage local stock market investments.
Singapore and Malaysia have introduced initiatives to boost local currency stock markets. Singapore, in particular, has formed a central bank task force to enhance liquidity in its stock market. The Monetary Authority of Singapore (MAS) is unique among central banks, as it simultaneously functions as a central bank, finance ministry, and regulatory authority.
DE-DOLLARISATION AND TECHNOLOGY SHIFTS
De-dollarisation trends pose another threat to the dominance of US capital markets, potentially accelerating due to geopolitical tensions and the rising acceptance of alternative currencies like the Singapore dollar, Malaysia’s ringgit, and South Africa’s rand.
By enabling the emergence of global financial platforms that bypass traditional capital markets, advances in blockchain and decentralized finance (DeFi) are also likely to diminish, in the long term, the influence of traditional market intermediaries, including those in the US.
From a broader perspective, technological shifts will inevitably create geopolitical impacts. In the first half of this year, according to GlobalData, the USA secured over half of global high-value VC investments, reflecting its strong innovation ecosystem. But as competing powers’ efforts to attain technological leadership become increasingly credible, how will the US sustain its economic and military dominance in the long term?
The relationship between US equities and international equities is intricate and influenced by global economic conditions, geopolitical events, currency fluctuations, and market sentiment. Understanding this relationship is vital for diversifying investments, managing risk and seizing global growth opportunities. Proper asset allocation and awareness of the inherent risks in passive investment strategies like index hugging are crucial for the performance of a multi-asset portfolio.
To preserve the purchasing power of savings and retirement portfolios, it is essential to identify emerging trends and recognize that unexpected or unthinkable events can occur, regardless of our beliefs.
By Bainer Michael Preiss
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