Welcome to America the Uninvestible.
That seems like a strange thing to say about the go-to destination for investors around the world, offering the world’s biggest companies, the most liquid markets, and rule of law to protect shareholder returns. Government interference, too, is supposed to be limited. The fact that U.S. stocks have outperformed the rest of the world over the past decade has certainly helped as well.
In fact, it was only last year that we were talking about China being uninvestible. Its zero-Covid policy had crushed economic growth. The government crackdown on tech companies like
(ticker: BABA) and
(0700.Hong Kong) soured investors on what had been the best-performing stocks in that market. And rising tensions between the U.S. and China, including the possibility of the delisting of Chinese stocks from U.S. exchanges, made investing in the world’s second-largest economy especially fraught. For most Americans, that’s likely still the case, and Chinese stocks now look better as a trade than a long-term investment.
But for some international investors, particularly those with no interest in democracy and with money to burn, it might be the U.S. that is starting to appear uninvestible. The U.S. decision to freeze Russia’s dollar assets and limit the access of Russian banks to the Swift—Society for Worldwide Interbank Financial Telecommunication—system made holding dollars riskier for any country that might find itself on the opposing side.
The current debt-ceiling standoff, too, raises the prospects of a potential U.S. default and could cost the country another AAA rating at one of the credit-rating firms, the kind of own-goal that serious nations shouldn’t make.
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Nor is government meddling just for China anymore. Florida Gov. Ron DeSantis targeted Disney World’s sweet deals because
(DIS) was too “woke,” while California halted a $54 million contract with
(WBA) after the company said it wouldn’t provide abortion drugs in 21 states that had threatened to sue it. Tech giants like
(AAPL),
(GOOGL), and
(META) are getting it from the left and the right over antitrust issues and free speech. It may be less centralized—and more haphazard—than China’s strict controls, but it must surely rub investors the wrong way.
The latest blow, however, may have come from Switzerland, of all places. With
(CS) under pressure, the Swiss government orchestrated its acquisition by
(UBS) for $3.3 billion in stock. The bailout, though, wiped out holders of unsecured debt known as AT1, even as equity holders were allowed to walk away with something. It doesn’t take an economics degree to know that’s not how it’s supposed to happen. At the same time, the merger was pushed through without a shareholder vote, once again circumventing the rules. Now, Switzerland is not the U.S.—and Europe has protested the bond wipeout—but it does raise the question of just how far Western regulators will go in a crisis.
“[I]f Western economies no longer treat property rights as sacrosanct, why should capital keep flowing from the ‘greater South’ into the ‘unified West’?” writes Louis-Vincent Gave, CEO of research firm Gavekal.
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Maybe it won’t. In January, foreign investors sold $36.6 billion of U.S. Treasuries, according to Citigroup data, the fourth month of outflows over the past five. And while the actual dollar amount has risen 6.8% since the end of 2019, the percentage of U.S. government debt held by foreigners has fallen to 29.3%, from 39.2% at the end of 2019.
Gold has been a beneficiary—central banks bought about $70 billion, or 1,136 metric tons, of gold in 2022, according to the World Gold Council—and it’s one investors, in or outside the U.S., might want to look at. Gold has had a great start to the year, with the
exchange-traded fund (GLD) has gained 9.5% so far in 2023. That’s a reflection of lower bond yields, the possibility that the Federal Reserve is getting closer to the end of its rate hikes, and risk-off sentiment since Silicon Valley Bank’s collapse. As long as investors don’t start feeling too comfortable, gold could keep rising.
It may also be time for U.S. investors to look overseas for stocks. Over the past 10 years—the There Is No Alternative era—the
ETF (SPY) returned 12% including reinvested dividends, easily outpacing the
ETF (VEU), which returned just 4.1%. That may be starting to change. Matthew Poterba, senior analyst at Richard Bernstein Advisors, notes that global and U.S. stocks tend to move in long cycles of out- and underperformance—and the cycle may be shifting away from the U.S. That’s in large part due to the rest of the world’s lower exposure to technology and tech-related sectors, which tend to do better when interest rates are low, money is easy to come by, and growth stocks outperform.
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“Today’s macro fundamentals are the opposite,” Poterba explains. “If we are correct that inflation and interest rates will remain higher for longer, international markets’ sector exposure might boost performance.”
There are better places than home.
Write to Ben Levisohn at [email protected]
