The past year has been one where investors have been looking to talk down US shares and talk up other markets such as the UK.
Lower valuations in markets such as the UK were often cited, though a more detailed analysis showed that similar companies tend to trade on similar valuations and that the top-down ‘expensiveness’ of Wall Street came from its large technology sector, with the dearth of tech companies in the UK index mostly accounting for the aggregate gap in valuations.
For a while UK equities performed well; rising 6 per cent over the first six months and the S&P 500 index fell by 4 per cent in value in sterling terms as the dollar weakened.
More recently, however, the dollar has stopped falling and the last two months have seen US equities outperform UK equities by nearly a couple of percentage points.
The outperformance of UK vs US equities in the first half was mainly a currency matter, not entirely unconnected to Donald Trump’s antics, but a trend that may have now ended. Indeed, the macro trends for the next phase might favour dollar assets over sterling assets.
At one point, the dollar fell by over 8 per cent relative to sterling, that matters to UK-advised clients as one can in effect subtract the 8 per cent from any gains made on a US-equity portfolio, providing a major dent to returns.
Currency movements are generally tied into economic fortunes and these have been headline news all year.
Reversing course
The current state of play on president Trump’s tariffs seem likely to cost shareholders in US businesses less than shareholders in European companies as reciprocal tariffs have not, so far, been announced.
More importantly, all equity valuations are based on local bond rates.
In the US, bond yields were rising earlier this year due to concerns about the scale of bond issuance required to pay for the “big beautiful bill” (tax cuts) and concerns over the inflationary effect of tariffs.
Both these concerns may return, but for now bond yields are limited by interest rate cuts; the Fed funds rates have fallen a per cent over the past year and may be heading below 4 per cent soon.
The 10-year bond yield rose in the first half of the year (the period of dollar weakness) peaking at 4.8 per cent in January, but as economic concerns have moderated the yield has fallen back to 4.3 per cent.
This leaves the yield curve rising, which normally indicates strong growth, but it also allows the US to fund its debt, for now, cheaply, but only at short duration.
