Editor’s Note: Neil Dwane is managing director, portfolio manager and global strategist at Allianz Global Investors. The opinions expressed in this commentary are his own.
Since the 2008 financial crisis, the US stock market has risen nearly 360%, significantly outperforming all other equity markets. The US tech sector has led the way, thanks to the FAANG firms (Facebook, Amazon, Apple, Netflix and Google) and the widespread adoption of disruptive new technologies such as cloud computing and artificial intelligence.
Yet we believe rising geopolitical tensions, rapidly expanding government borrowing and the threat of more taxes and regulations jeopardize the future performance of America’s markets. And just as the hyper-partisan state of US politics reaches a fever pitch in the runup to the 2020 election, political risks could be subsiding in other parts of the world. For investors, it might be the right time to diversify away from the United States and take a look at investments abroad.
In the UK, there is a strong chance that the December general election will bring a conservative majority and a clear Brexit strategy that could reduce uncertainty and fuel the markets. With the pound 23% undervalued, and with UK real estate and financial assets historically cheap, we think near-term returns could approach 50% for UK stocks denominated in other currencies.
The European Union should also benefit from a post-Brexit world. Reduced uncertainty would likely boost undervalued equity markets there and help new European Central Bank President Christine Lagarde better unify the region’s member states. Still, European fixed-income investors are growing increasingly anxious about negative yields, so they may need to hunt for income elsewhere — perhaps among dividend-paying stocks, or Asian or US high-yield bonds.
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While Japan remains demographically challenged due to a shrinking, aging population and a low birthrate, consumer spending could grow as the 2020 Olympics — hosted in Tokyo — approach, and an influx of tourists there fuel the local economy. Japan’s equity markets are also enacting important structural changes and have improved returns to shareholders thanks to rising dividends and share buybacks. This is fertile ground for active investors to identify investment opportunities.
China is grappling with trade war headwinds and rising strategic competition with the United States, but it also stands to benefit from its “Made in China 2025” policy — its plan to become the global leader in advanced technologies. China is accelerating its high-tech aspirations as it switches from gasoline-powered to electric vehicles and from US-made semiconductors to its own designs. Already the world’s second-largest economy, China trails only the United States in terms of overall R&D spending, and it is making great strides in medical technology, AI and data. China’s economy is also being supported by the continuing consumer innovations of the country’s high-tech giants, known colloquially as the BATs (Baidu, Alibaba and Tencent). Meanwhile, the FAANGs in the United States are facing mounting public pressure and a growing threat of regulation — leading us to think that in the coming years, the BATs could fly farther than the FAANGs.
The rest of Asia is certainly suffering from trade tensions between the United States and China, but there are opportunities to make great progress. The vibrant, youthful economies of India and Indonesia could lead the way. Their governments have been focused on delivering much-needed reforms, to varying degrees of success. For example, Indian Prime Minister Narendra Modi pushed through the 2017 goods and services tax which created a simplified national tax code that replaced a confusing local patchwork. In Indonesia, Prime Minister Joko “Jokowi” Widodo is focused on building much-needed infrastructure to help drive growth.
All the while, the US equity market appears overvalued, trading at around 19 times earnings, and we don’t expect much more upside in 2020 as a possible recession looms. Meanwhile, non-US equities are around 20% to 45% cheaper, offer higher dividend yields and better earnings growth prospects, and may benefit from a softer US dollar.
While the United States has offered investors strong returns for many years now, the country will likely spend much of next year grappling with growing political uncertainty. The real investment opportunities in 2020 may very well be found abroad.