- October 4, 2022
- Posted by: CFA Society India
- Category:BLOG, Events
Speaker- Ritika Mankar, CFA, Editor/Strategist Global Investment Strategy- BCA research
Moderated By- Biharilal Deora, CA, CFA, CFP, Director Abacus Asset Management LLP
Contributed By- Namrata Maheshwari, CFA, Volunteer, CFA Society India
“The US accounts for around 62% of any global equity index – from nearly 40% 10 years back and among the top 20 companies of the world 10 are from US. Will in the next few years the same growth trend will continue, or is this an inflection point where we can expect this share will shift towards east.” This is a key point that questions about continued linear growth in the minds of finance professionals and institutional and retail investors.
US: The star protagonist of global equity markets: The speaker envisaged the leadership of the economy for more than 100 years which is expected to continue for a few more years. Furthermore, the country also offers more depth in equity markets which is not there in other major markets like China and Germany. This leadership was gradually strengthened over last two decades when many small and mid-sized companies of US continued to register robust growth and were placed in top list. China, the second largest economy across world gives attractive investment avenues as it contributes 4 names in the ranking with more contribution in the list is expected in future driven by growth of more and more mid-sized companies in the second largest economy of the World.
Trouble in the talent pool of companies- US may have hit peak Oligopolization: Ms. Mankar highlighted the fact that the leading economy may have touched peak of oligopoly as more than 20% of revenue is generated from top 10 firms who enjoy juicy margins. Further it was stated that majority of US population is not quite happy with current corporate influence on economy and there could be chances of regulatory intervention which could interrupt current growth scenario. The similar situation was seen in Europe 20 years back which supports the fact that the shift in leadership status of the US economy can be seen in future.
Investment Conclusions: The speaker stated that given the fact that % of mid-sized firms to total firms in US and their relative stagnant revenue contribution highlights the issue that the economy’s contribution in global leader might decline with reducing / flat talent pool of firms. According to speaker, healthcare companies of US are most vulnerable to move out from the global leaders list. It was highlighted that China, Korea, Taiwan, Germany, Japan and the UK are expected to contribute more names in the top 20 list, led by growth in low cost production, technology advancement, more focus on robotics and increased adoption of automation in manufacturing. Furthermore, growth in commodity sector primarily oil and energy will bring names of more German and UK based firms in the leaders list.
The main takeaway for wealth Industry Professional as per speaker’s firm were: “Diversify, to maximize risk adjusted returns; Global equities exposure should be built by investing in non-US equities too; reduce allocations to US equities over the long run since the US’s weight in global indices will peak soon; big economies may not necessarily be home to large companies or best performing stocks; and beware of the follies of linear extrapolations, actively look for inflexion points.”
Viewpoints shared during the Q & A session-
- Is the US under recession as there is contraction in the economy for two consecutive quarters: Does not seems to be as the indicated from the unemployment data. For every unemployed person there are nearly 1.8 jobs available in the economy. Also the first set of data are more of estimates and as per the speaker’s colleague there is 35% probability that Q2 2022 GDP of US will go upward revision. Moreover, the unemployment rates in 2008 recession was 8% and currently its less than 4%.
- Fed has increased its interest rates twice to around 2.25% – 2.5%: By beginning of 2023, market expectations of the Fed rate is around 3.4%. As per the speaker, the neutral rate of Fed is between 3.5% to 4% so it won’t matter much.
- This stance of Fed will further impact the currency market of dollar against Indian currency and other global currencies: USD is much overvalued and it is expected to undergo revision in long term (more than one year).
- The revenue growth and numbers of Indian companies is less than global peers: The heterogenous nature of Indian demand in terms of consumer tastes and regulatory challenges due to which Indian company can’t generate comparable revenue growth as their global peers.
- The speaker has considered revenue to be the parameter and not other metrics: Revenue is not volatile as market cap and revenue influences market cap. Also based on top-down approach, not much relation is there between GDP growth and earnings growth, but GDP is related to revenue growth.