Rudi's View | 10:05 AM
In this week's Weekly Insights:
- New Trends & Recurring Anxieties
- FNArena Talks
By Rudi Filapek-Vandyck, Editor
It seems almost like a preposterous idea, especially after such a long stretch of US outperformance, but what if 2025 is marking the end of the trend that has seen US markets dominate global investment flows and returns post GFC?
On some rough calculations (not corrected for FX, tax, costs, etc) US equities have outperformed the rest of the world by more than 6% per annum when measured from the March 2009 low during that crisis, which by anyone's standards is phenomenal.
The explanation is three-fold; we are living through another technology-driven era and the US sits at the centre of it, US companies have become more resilient and more profitable than they've ever been (better than their offshore peers), plus US equities are also much higher valued than their offshore comparisons as more and more investment flows were welcomed from overseas markets.
That latter part is equally important: by the end of 2024 it is estimated non-US investors held assets worth US$62trn, or more than twice the size of the US economy.
During times of persistent US outperformance, it had become pretty much a no-brainer for investors outside the country to allocate ever larger parts of their portfolio to US markets, a trend that has equally become popular among investors in Australia.
Things have changed a little bit throughout 2025, but not dramatically so. US equities make up 64.7% of the MSCI ACWI, a leading index for global equities from 23 developed and 24 emerging markets, down from a peak of 65% in late 2024, but that percentage is arguably still enormous.
Consider the long-term average sits a smidgen above 50% and back in 2008, during the GFC, it had dropped as low as 41%.
Today's outsized market weight for US equities is equally the result of the virtuous cycle that developed since subprime loans pulled the US economy in a deep crisis, with a strong US dollar, above-average bond yields and better equity performance continuing to attract an ever larger size of global investment funds.
2025 is different
It's easy to assume this trend is now firmly set in stone and destined to continue for much longer into the future. Certainly, my impression from views and projections as expressed by traders and investors locally suggests the idea of US dominance and eternal outperformance has now become universal truth for many.
But as calendar year 2025 is approaching its natural terminus, US markets already are no longer leading this year's performance tables.
Certainly, a near 20% surge for the Nasdaq and 14%-plus gain for the S&P500 are nothing to be sniffed at (and well above long term averages) but that doesn't even make it into this year's global Top Ten where returns between 59% and 29% (in local currencies) have been achieved by markets in South Korea, Poland, Greece, Spain, Mexico, Brazil and Vietnam.
It's just as easy to dismiss this year's reversal in global performance rankings as a one-off aberration, especially from an Australian perspective where indices --even with outsized dividend payments-- are yet again lagging the Mighty USA, but there's a growing view among investors globally that what we are witnessing this year might well be a reversal of the trend that has dominated the global landscape up until last year.
The easiest motivation for such fundamental trend change starts with the current peak representation of corporate America; even if nothing changes in the dominance of US megacap companies, is it feasible to see their relative representation in global equities and investment fund flows increase even further?
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