Overview
Through adversity comes opportunity. Six months ago it was unthinkable to back European stock markets over those in the United States. But through a period of substantial change in policy, and even the post-war globalisation consensus itself, that debate has become a live one, high on the agenda for both heavyweight investors and the latest episode of Fidelity Answer (listen here).
Where Europe and America have made mistakes economically in the past is a long and subjective conversation. Yet after a whirlwind few months of diplomatic and political action, the aims - if not yet the detailed plans - of authorities on both sides of the Atlantic for the next decade are becoming clearer.
“There is a bipartisan consensus that whatever has happened over the past 30 years in the United States needs to change,” says fund manager Ashish Bhardwaj. He specialises in the industrials sector, which the new administration aims to bring back to middle America. “The whole business model in the US, which was based on an outsourcing-based business model with companies trying to become more and more capital light, is going to change.
”Sooner or later, he says, the outcome should be an investment surge in the US, where the capital built up in the long boom in securities markets is put to use. The near term for both the US economy and its markets, however, will be rocky.
“We are passing through a transition period from the old economic model of the last 30 years to the next decade. That will bring an extended period of volatility that will last for some time,” Bhardwaj says.
“To have a new project, have a new factory in the US, you need to know how much the equipment will cost, how much the labour will cost, how much the building of this factory will cost, what price you can sell at, what will be the competitive dynamics, and so on. Only then can you go ahead and make a USD $2 billion, $3bn investment.”
Tariffs will also make life more difficult for the European companies which have had unfettered access to the spending power of US companies and consumers in recent decades. But, argues Marcel Stotzel, whose strategies focus more on European companies, that may finally be creating the conditions for a changing of the guard.
“One of the amazing statistics of recent times is that US GDP per capita has gone from being roughly in line with that in Europe to essentially twice [as much],” he says. That was all underwritten by an integrated, continent-wide economy that delivered corporate winners capable of dominating globally.
What if European governments, economies and companies were finally getting closer to delivering something similar? “What if Europe had a JP Morgan or a Bank of America instead of 20 national champions,” asks Stotzel. “That would be a company capable of delivering real value and competing globally.”
“Over the last 20 years, the playbook for investing in Europe was to focus on those selling outside Europe. Now potentially that might be flipped on its head. If you look at Europe as an index, a third is based on domestic sales and two thirds on non-domestic. Europe is less important to European companies than you think. Just like US companies, they have been selling abroad.”
He cites domestic European players - banks, airlines, and the travel sector - as among the most interesting ways to play that trend currently.
“The European software sector is pretty much immune to tariffs and to reshoring (or any of that kind of push). You fire up your computer, download the software and there's little that Trump or anybody can do about that.
“But other players, such as European capital goods names or areas like autos and aerospace, will probably be expected to invest more in the US if they want to sell into that market going forward.”
Stick or twist
Back to our central question, and Bhardwaj remains convinced by the longer-term case for allocating to the United States, even if he sees the months ahead delivering more volatility.
“The US, among all the developed world, has the best demographic profile, be it growth in population due to natural change or immigration,” he says.
“For the next 20 to 30 years, it will have the best population growth. And if you know anything about the developed world, it is that if a country has a declining population, it is very, very hard for that equity market to outperform.”
