Advisors weigh in on how politics, valuations, might influence investor decisions
US assets have teetered on the edge of a ‘sell America’ market a number of times since the announcement of global tariffs by the US federal government last April. This year’s opening salvos of a US intervention in Venezuela and the news of criminal investigations into the US Federal Reserve prompted short bursts of ‘sell America’ activity that briefly impacted US equities and may have more sustained impacts on the US dollar. Amid the news and the noise of these market moves, though, the question arises of whether a long-term trade away from the US is now something for advisors to consider.
Shiraz Ahmed, Founder & CEO of Sartorial Wealth, and John De Goey, portfolio manager with Designed Wealth Management, each offered their perspectives on the idea of either divesting from, or allocating marginal dollars away from, US assets of any kind. While their perspectives on the question differed, they both root their approaches to the US market in an objective view that valuations, not politics, are the more fundamental issue for investors and advisors to consider.
“Higher net worth individuals are very pragmatic and, and historically, always have been. I mean, the reality is, this administration is here today, there’ll be a different one in the not too distant future. And so they’re not going to make long-term, massive decisions based off what a current administration is going to be saying. They may snowbird a little bit less. But I find that doesn’t actually change how they invest their money. Valuations, on the other hand, do,” says Shiraz Ahmed, when asked to outline the arguments for a ‘sell America’ trade.
Ahmed notes that much of the market growth experienced in US equities recently has been concentrated in AI-related names that have become incredibly expensive. He says that many investors have seen that valuation issue and they’re considering other areas to allocate towards. That valuation-induced behaviour, however, is not motivating much in the way of total divestment. Instead, marginal invested dollars and rebalancing profits are being put into Canadian or global equities with more attractive valuations.
Even in the face of a rational argument about valuations on US markets, Ahmed notes that we cannot deny the size and importance of the United States as an economy. Moreover, not only are many of the world’s largest companies based in the US and traded on US exchanges, the intellectual property that has made companies like Nvidia so successful is largely US-based. The company has built moats around its innovative capacity, which Ahmed argues no emotional argument about politics can deny.
In his own practice, Ahmed uses a quantitative algorithm-driven approach. That process helps filter out client and advisor emotions in market decision making, allowing him and his team to more objectively seek value and upside. Because the model is momentum-based, Ahmed says it still holds some of the AI-related US names that have driven so much market growth in recent years. What it’s recommending now, though, is that a higher share of the marginal dollar moves into other geographies.
John De Goey, for his part, divested from US markets in 2020 because he was worried about valuations. His decision was based on a CAPE ratio at its second-highest point ever and a Buffet ratio, which measures market capitalization over GDP, at around 220. He cites research by Nobel laureate Robert J. Schiller which dictates that when the CAPE ratio hits a certain level, you can extrapolate expected returns based on the past ten years’ data. When the CAPE ratio hits the low 30s to mid 40s, we can expect returns over the next decade of around zero. De Goey, notes that US markets hit that level in 2020 and believes we may see all of the past six years’ gains given up over the next four.
De Goey admits that he was early in his prediction. While he has allocated his clients to a series of products aimed at generating above the expected stock market returns of 6-7 per cent per year, they have underperformed the real returns seen on US markets since 2020. His clients avoided losses in 2022’s bear market, but the unrealized gains still outweigh that winning period. While he admits to that, De Goey still doesn’t see a reason to re-enter US markets now, and says that earnings would have to rise considerably while prices stayed flat in order to present an attractive CAPE ratio again.
“I’m not disputing that the U.S. market is robust and resilient. It’s extremely narrow. It’s been led by technology-based large caps, and we’re talking mostly about the Mag Seven. And so, I remain suspicious of the valuations in the Mag Seven,” De Goey says. “To me, anything that’s trading at 60 or 70 times earnings is not a good price. So, as a value investor, I remain leery.”
For advisors who have remained invested in the United States and may want to reallocate away from some of the country’s more stretched valuations, De Goey notes that more tactical shifts are available, that could include allocating away from broad market indices or the magnificent seven towards small-cap allocations in US markets where valuations may not be so stretched.
While De Goey and Ahmed have taken different stances on their allocations to US markets, they both emphasize the importance of an analytical process rooted in hard numbers as a guide when emotions run high.
“If you don’t have a process, get one,” says Ahmed. “When you do, really hone it and define it. Take a macro view if you don’t have one, or lean on somebody who you respect, somebody who you follow if you don’t have one yourself. And then allow that to help and guide you, especially in times when the water starts getting a little muddy, when you don’t know and emotions are high.”
