US Exceptionalism Or Just America’s ‘Exorbitant Privilege’?
'Thatcher's Curse' And The Strange Death of 'Value Investing'?
The debate about whether or not US stocks are cheap often uses a P/E valuation framework. This is misleading, inappropriate and dangerous at the macro-level. Better to understand the liability structure of investors and the direction of cross-border capital flows. These explain why momentum investing has outperformed value investing since international markets were deregulated forty years ago.
Rob Armstrong’s excellent Unhedged column in The Financial Times has recently hosted an impressive debate about why US P/Es are structurally higher than elsewhere. We largely disagree with the conclusions, because from our corner P/Es are anyway a misleading and inappropriate analytical tool for the macro level. In other words, they explain little and entirely miss what is going on beneath the surface of the market.
However, the latest salvo (FT 12/06/2024) highlights the importance of cross-border capital flows to the performances of Wall Street versus EM stock markets, and it shows why ‘value investing’ at the macro-level is a highly dangerous sport.
Typical of the debate the chart below which shows the US market P/E (orange line) to be consistently above that for Emerging Markets (where available). The conclusion for ‘value investors’ would have been to load up on EM equities and shun America. Bad luck on that call!