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Investing in the American Dream

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Over the past 10-years, the S&P500 is up 200% compared to the Euro Stoxx 50, which is up just 50%. Even in this difficult year, the S&P500 continues to beat the Euro Stoxx 50 by over 10%. The outperformance is not a coincidence but a result of various factors, many of which are arguably still effective today.

Kristian Camenzuli, Investment Manager at Calamatta Cuschieri discusses why he thinks investors should hold US equities in their portfolio.

The US market is more defensive than the European market during bear markets

History shows that US equities generally decline less than European equities (including this year when the epicentre of the crisis is in the United States) and generally rebound faster and more sustainably.

The US market is more defensive than European ones during bear markets, partly due to the domestic bias. Personal consumption historically represented 70% of the Gross Domestic Product in the US. This means that US companies are highly correlated to the performance of the overall domestic economy.

We expect US economic growth to contract less and recover faster than European GDP growth, resulting in continued outperformance of US stocks compared to their European peers.

Therefore the outperformance of the US stock market is expected to continue once the pandemic is over. Although US and European companies are very international, their EPS growth remains very sensitive to their respective domestic area (correlation of more than 65% in both cases).

Europe is a loser of the current crisis

Europe is a loser of the current crisis, both politically and economically. The debt levels of France and Italy are big problems for the stability of the Eurozone and the lack of agreement amongst the member states on how to solve this crisis continues to cripple the economy.

In the current environment, the ECB has done the job (despite a delay in ignition), but the Fed had more room for manoeuvre. In particular, the Fed decided to intervene directly on the high yield credit market.

2020 is also an election year in the US and looking at past election years, the majority resulted in strong gains for the US stock market.

The "big dog" effect

A European investor reduces risk of his/her portfolio by diversifying with US stocks. Why? The US is the big dog in the global economy. When the US economy is doing poorly, it tends to drag other stock markets down, diminishing (though by no means eliminating) the diversification benefit of foreign investments.


The US stock market is by far the world’s biggest, at about five times the size of the next largest. When it comes to being able to trade stocks efficiently even during times of investor distress, the US has an advantage over most other countries.

The US is home to the ‘FAANG’ Stocks

FAANG is an acronym referring to the stocks of the five most popular and best-performing American technology companies: Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google).

In addition to being widely known among consumers, the five FAANG stocks are among the largest companies in the world, with a combined market capitalization of over $4.1 trillion as of January 2020.

Their substantial growth has been buoyed recently by high-profile purchases made by large and influential investors such as Warren Buffett and George Soros. These are just a few of the many large investors who have added FAANG stocks to their portfolios because of their perceived strength, growth, or momentum.

US equities generally rebound faster, partly due to greater responsiveness of policy makers

It is a fact that US policy makers immediately come to the rescue of the economy and financial markets when there are signs of trouble. The same cannot be said for European policy makers. It is time to get a consensus in Europe. There are clear divergences regarding the ECB role, the federal budget, the pooling of public debt.

Amercians are more exposed to the stock market than Europeans

More Americans than ever are invested in the stock market. Just 30 years ago only about 30% of Americans owned any form of stock—now more than 50% do.

The increase in equity exposure is a result of rising popularity of ETFs and mutual funds, making stock market investing easier and safer, since risk is spread across many securities.

But the bigger reason is the increased popularity of retirement plans in the 1990s, which gave many Americans an easy access to the stock market. Often they are automatically invested in stock.

The US markets have outperformed European markets year after year

We compared the return of an equity allocation made of 50% S&P500 and 50% EuroStoxx (in euros, monthly rebalancing) with the return of the EuroStoxx over the past 10 years.

Over the past 10 years, the EuroStoxx outperformed the 50-50 allocation only twice: in 2012 (Draghi’s “whatever it takes”) and in 2017 (hopes of a European reflation).

The 50-50 allocation outperformed during all bear markets (2011, 2015, 2018, 2020).

The results of the study shows that integrating US equities into a European equity allocation makes a portfolio less sensitive to short-term cyclical fluctuations while increasing its exposure to long-term growth.

Does an investor have to hedge US dollar risk when investing in US stocks?

History shows that hedging currency returns doesn’t improve international stock returns, at least not over the long term. Currency hedging (holding a stock denominated in a foreign currency and an equal but opposite short position in the currency itself) is intended to prevent currency fluctuations from hurting the stock price. While it sounds good in theory, the time and cost it takes to hedge currency has not paid off over time. Since 1973, currency hedging has detracted from returns in 50% of quarters, and contributed to returns in 50% of all quarters.

Plus, currency tends to be a relatively small component of returns over time, especially compared to earnings growth and price-to-earnings ratio expansion.

The US equity market complements the European equity market from a sectoral point of view

The US market has structurally a growth bias towards sectors we are overweight on at the moment. Technology, Healthcare, Telecommunications account for circa 55% of the US market capitalization.

On the other hand, the Europe market has a Value bias due to the weight of Cyclicals and Financials.

Technology, Healthcare and Telecommunications services are among the big winners of the current crisis. Whereas Value and Financials are among losers, especially in Europe where core developed bond yields should remain low due to the Japanization of the economy.

The Covid Winners

If you want to invest right now, you have to own the Covid winners. These are equities that include firms that are “big enough and deep pocketed enough” to weather the economic impact of the coronavirus crisis. The companies are investible through an economic downturn for their healthy balance sheets during an economic downturn.

Some US companies we like at this point in time include Amazon, Microsoft, Home Depot, NXP Semiconductors, Procter and Gamble, Alphabet and Mastercard.

From an ETF perspective, the iShares Edge MSCI World Minimum Volatility UCITS is an attractive investment. The Fund seeks to track the performance of an index composed of selected companies from developed countries that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets.

For those wanting to take on addition risk, we recommend the iShares MSCI World UCITS ETF. It has an exposure to international stocks with a bias to the US (65% exposure).

Outlook on the markets

While millions of people have lost their jobs (and are therefore likely to be much more cautious and reluctant consumers in the future), many mid-sized companies are struggling to survive, and uncertainty about this year’s earnings performance seems to be at a record high.

In the 15 trading days from March 23, the S&P 500 posted its biggest rally since 1933, rising +27%. An unprecedented flooding of the markets with central bank liquidity combined with record high government rescue packages – i.e. “politics“ – is scoring well with investors. In addition, following the panic selling, investors appear to have record amounts of un-invested cash at their disposal, so that the “positioning“ also suggests that even more money could flow into risky assets.

The spoilsport is to be found in “profits“, with record uncertainty about this year’s earnings dynamics as well as the profile of the profit recovery. With regards to earnings development, we now expect a much flatter “V-shaped” recovery than we had originally anticipated.

We continue to believe that the US will outperform its European peers in the months ahead. Although short term, the S&P500 could be in for a correction before we rally into the election period.

Carl Icahn (one of the greatest investors of all times), who at 84 has traded through all the stock-market crashes since the Great Depression, was quoted as saying “the future is just too unpredictable for the S&P 500 to be trading at 17 times 2021 earnings estimates. You cannot really justify that multiple.”


The information, views and opinions provided in this article are provided solely for educational and informational purposes and should not be construed as investment advice, tax or legal advice. This article was issued by Calamatta Cuschieri Investment Services. For more information visit https://www.cc.com.mt

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