Even when taking account of currency movements and varying economic growth in both countries, US equities have comprehensively outpaced equities on this side of the Atlantic. Giles Parkinson discusses the US stock market’s outperformance.
3 minute read
1985 witnessed a number of important events. Among the more memorable: Mikhael Gorbachev became leader of the Soviet Union; scientists of the British Antarctic Survey discovered a hole in the ozone layer; Microsoft launched the first version of its Windows operating software; and Vodafone established the UK’s first mobile phone network.
Perhaps less memorably, October 31 1985 marked the last time the UK’s FTSE 100 index, which measures the share price performance of the UK’s leading companies, stood above its American counterpart, the Dow Jones Industrial Average.
Fast forward to October 16, 2017, and the Dow stood at 22,957, while the UK’s flagship stock index trailed at 7,527. This means the Dow has risen 1570 per cent since the end of October 1985, while the FTSE has gained a comparatively miserly 446 per cent.
Even when taking account of currency movements, varying economic growth in both countries, and the greater propensity of UK companies to return cash to shareholders in the form of dividends, US equities have comprehensively outpaced equities on this side of the Atlantic.
A number of factors probably explain this disparity. The US is an instinctively capitalist nation. The flexibility of the labour market enables its companies to be more aggressive in cutting costs during downturns. The country also scores highly on ‘Ease of Doing Business’, ‘Economic Freedom’ and other assessments of bureaucracy.
The United States has also been able to attract far more than its fair share of skilled workers. In October 2016, the World Bank said the US has historically hosted close to half of all high‐skilled migrants to the OECD and one‐third of high‐skilled migrants worldwide.1
It appears the country’s high standard of living and dominance of the international rankings of elite universities has created a self-reinforcing virtuous circle. It is surely no coincidence today’s tech giants – Facebook, Google, Apple and Microsoft – were all founded in the US. This isn’t to say that other countries don’t innovate or have anything to offer, but America is clearly the dominant world leader in these industries of the future.
However, it isn’t just in technology where American companies are ahead of their international peers. While it may not be true in each and every case, as a general rule an American company tends to have superior financial performance to its foreign peers as measured by the likes of profit, sales per employee, and profit margins.
This is critical because over the long term, it is the underlying performance of a company that determines stock price performance. In that regard, the majority of US businesses continue to stack up favourably against their international rivals.
Don’t look back in anger
Back to the Future was 1985’s highest-grossing film in which the film’s main character was sent back 30 years in time to meet his future parents, only to be returned to the present day. Outside Hollywood, it is impossible to know exactly what the future will look like. But it is probably unwise to bet against US equities repeating their outperformance of the past 30 years in the coming decades.
That’s why we think it is important to have exposure to a globally-diversified portfolio of equities, rather than simply focusing upon the UK.