Words on wealth: investors must end their infatuation with the US

“When America sneezes, the world catches a cold.” This saying, which has been around forever, epitomises the dominance of the US financial system in the global economy. And it reflects the love affair investors globally have had with the US and how dependent they have become on its stocks and bonds.

You would have thought that the global financial crisis (GFC) of 2008, which wiped billions of dollars off investors’ balance sheets worldwide, would have reset the global financial system, shifting it away from US dominance. But it didn’t. The US government and Federal Reserve stepped in to avert a repeat of the Great Depression of the 1930s by bailing out bankrupt financial institutions, reducing interest rates to near-zero, and printing money, euphemistically called “quantitative easing”. Stock markets bounced back, and the status and strength of the US dollar as the world’s reserve currency never seriously came into doubt.

Then came Covid. The world economy froze, and radical monetary measures were again invoked to resuscitate it. But this time, there was a problem: inflation, partly due to trade blockages directly caused by the pandemic, rose alarmingly.

These events compounded US debt levels. From the GFC onwards, US government debt skyrocketed, forcing it to allocate more and more of its budget to interest payments.

Countering America’s economic woes, and perhaps masking their gravity, was the extraordinary rise of the tech giants, originally labelled the FAANG stocks and now, with a few changes, known as the Magnificent Seven. Investors piled into these stocks, driving up their prices to unrealistic “bubble” levels, to the extent that they account for about 20% of the MSCI All Country World Index, which comprises about 2,500 companies around the world. 

To top it all, making America’s economy and increasingly detached financial system more unstable than ever, have been the misguided efforts of the Trump administration to bring back manufacturing to the US. The imposition of high import tariffs and a policy of isolationism have alienated its closest political allies and trading partners and threatened the hallowed status of the US dollar.

Here are some reasons why I believe the US's ongoing domination of the global economy is in doubt and why investors seriously need to reconsider their US holdings.

Tariffs are fuelling instability 

Stanlib economist Kevin Lings, in a presentation at the Morningstar Investment Conference in Cape Town recently, said the trouble with tariffs is that they can be changed at whim, denying industry the certainty it needs to flourish and reducing the chances of companies building factories in America. “Business people will not invest based on tariffs – they’re too fickle,” Lings said.

He pointed out that although US imports from China have plummeted, imports from Vietnam have risen at about the same rate, showing that people will circumvent the tariffs where they can. Moreover, the tariffs simply represent a heavy tax on US businesses and, ultimately, its own consumers.

The tech giants are overvalued

Rob Perrone, senior investment specialist at Orbis, Allan Gray’s offshore investment partner, says it is unlikely that the S&P 500 Index, which tracks America’s 500 largest companies and is dominated by the Magnificent Seven (making up a third of the index), will deliver on the expectations built into the tech giants’ highly inflated share prices.

“For years, US stocks have been the darling of the investment community, thanks to the impressive performance of tech giants like Microsoft, Nvidia, and Apple, and boosted by high hopes of the benefits of artificial intelligence. But it is unlikely that such a success story is sustainable over the long term,” Perrone says. “To expect a great return, investors need to believe that reality will prove even more amazing than markets already expect.”

Many large investors believe the hype around AI is overblown. Reuters quotes Bryan Yeo, group chief investment officer at Singapore sovereign wealth fund GI as saying that market expectations could be way ahead of what the technology could deliver. “We’re seeing a major AI capex boom today. This is masking some of the potential weaknesses that might be going on in the [US] economy.”

The mighty dollar is vulnerable

Sahil Mahtani, head of macro research at Ninety One, says Washington’s growing embrace of tariffs, deteriorating fiscal position, and increasingly transactional foreign policy are threatening US dominance in global investment markets.

Mahtani says that, against other currencies, the US dollar has appreciated over 40% since 2011, affecting America’s competitiveness. A 20-30% correction could bring the dollar more in line with global cost structures. 

“While global investors are unlikely to lighten US exposure while American firms dominate global earnings and innovation, they might do so if there are compelling opportunities outside the US,” he says.

The erosion of the independence of the US Federal Reserve also threatens the dollar's appeal, Mahtani says. 

Debt levels are unsustainable

Debt across the US is at record highs – this applies to government debt, corporate debt, and household debt. 

Veteran investor and founder of Bridgewater Associates, Ray Dalio, says the US sovereign debt situation is at “a very dangerous inflection point”. He explains: “Put simply, the US is now spending 40% more than we’re taking in. This accumulation of debt service payments has spiraled over decades and is starting to squeeze away buying power. And if you run the numbers, there’s an imbalance between how much debt has to be sold, who the buyers are, and the likelihood of it all being bought.

“Together, these two influences are why I worry about [the US] suffering an economic heart attack in the near future.”

Polarisation is hurting America

A nation's economic and social stability lies in the size and strength of its middle class. Middle-class America is in bad shape, as reflected in the US’s growing economic inequality and political polarisation. The concentration of wealth and political power among a small elite is threatening the independence of long-established democratic institutions and looks likely to end in massive social upheaval. The great democratic experiment that began in the late 18th century and which produced the most prosperous and stable society in history is showing cracks. God bless America.

* Views expressed in this article do not necessarily reflect the views of Independent Newspapers.

** Hesse is the former editor of Personal Finance.

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