US vs Europe - The American Dream is alive and kicking
Is it purely coincidence that there are no European equivalents of Apple, Microsoft, Google (Alphabet), eBay, Facebook, Netflix or Twitter?
Our latest investment report, written by David Coombs and Mona Shah (senior research analyst at Rathbones), considers the relative merits of the US and Europe as places to do business and in which to invest. Our strategic asset allocation committee has been positive on US equities for over seven years and it remains one of our preferred stock markets. Over this time, this position has been challenged frequently, usually on the grounds of valuation and/or economic momentum.
The report considers a list of US companies that either don’t have equivalents in Europe (Google, Amazon, Walt Disney Co. and Berkshire Hathaway) or are distinctly higher quality than their European peers (Exxon, Coca-Cola, Visa and Nike) and concludes that the US is a more favourable environment for business.
Many factors could account for this, including:
- the size of the US market, and its common language and legal infrastructure
- access to capital and the health of the banking system
- R&D agglomeration around universities and Silicon Valley
- antitrust policies and political lobbying.
It is not simply about the structural advantages of the US market, however, but also about differences in management culture. The report also considers microeconomic factors, such as capital allocation, remuneration and dividend policies.
One of the key differences between the US and Europe is the lower level of political interference in business. With November’s presidential election in mind, it shows the historically low impact of politics on the US economy. While both candidates appear at this stage to be more interventionist and/or protectionist than their recent predecessors, the checks and balances of the US political system are designed to limit executive power.
While we acknowledge the risks attached to both candidates, therefore, we continue to believe in the US. Besides, with elections in Germany and France in 2017, there are also significant political risks in Europe.
Of course, valuations cannot be ignored, whatever the qualitative difference between stocks or markets. Relative valuations were usually cited as the reason for switching from US to European equities. Headline valuations do not tell the whole story, however, and the US appears better value when adjusted to reflect differences in sectoral balance and other factors. Besides, in a low-growth environment, high-quality companies justifiably command premium valuations.
Benefits of active management
Lastly, the report considers the difficulty investors face in achieving specific investment exposure. Country or regional indices now expose investors to a wide geographical mix of revenues and conventional asset allocation is no longer the optimal way to achieve distinct geographical exposure. Top-down thinking must be combined with a bottom-up understanding of individual companies. Active investment management, supported by insightful research, can give investors focused exposure to the US economy through high-quality companies that focus on delivering long-term shareholder returns.