Calm before the storm?

[Wizard]

I have assumed for a while now that the UK markets were pricing in a serious cock up at the end of the transition period, given recent performance by the Govt. that must surely be a very high probability.

The problem with that is that UK equities bear very little relation to the UK economy. With 75% of FTSE100 earnings now coming from abroad. So even if the UK economy tanks utterly, the effect on the UK stock market should be relatively small. Indeed, perversely, since most FTSE companies report in UKP, a collapse of the UK economy (and stering) should push the FTSE up.

So this obviously begs the question, exactly why is the UK stock market doing so poorly compared to RoTW? Pure sentiment?

Gryff

My bold.

Which is why I went on in the post you part quoted to say...

..whatever their exposure to the UK itself there will be a further general hit to all UK listed companies if we do end up with no transition period agreement. Another good reason not to put all of ones investment eggs into the UK basket.

Maybe that equates to what you refer to as sentiment.

[hiriskpaul]

I have assumed for a while now that the UK markets were pricing in a serious cock up at the end of the transition period, given recent performance by the Govt. that must surely be a very high probability.

The problem with that is that UK equities bear very little relation to the UK economy. With 75% of FTSE100 earnings now coming from abroad. So even if the UK economy tanks utterly, the effect on the UK stock market should be relatively small. Indeed, perversely, since most FTSE companies report in UKP, a collapse of the UK economy (and stering) should push the FTSE up.

So this obviously begs the question, exactly why is the UK stock market doing so poorly compared to RoTW? Pure sentiment?

Gryff

The worst performing sectors worldwide are financials and energy. The best is information technology. Compared with the global market, the UK market is very overweight financials and energy, very underweight IT. Brexit may have some influence, but the makeup of the UK stock market will likely have the biggest impact.

[88V8]

By year end we could have CV19 part II, seasonal flu, seasonal flooding, record unemployment. Plus Brexit Exit for which I bet few companies and still less the Govt will be well prepared.
So regardless of the source of earnings, I reckon sentiment, and general panic enthusiastically fanned by the media, could send the UK market well down.

After all, this Govt which I elected (yes, all by myself) despite the absurdly large Cabinet, has not shown itself overly adept at multi-tasking.
And the idea that all this stuff is 'priced in' well things never are priced in are they, when it comes to it.

V8

[dealtn]

By year end we could have CV19 part II, seasonal flu, seasonal flooding, record unemployment. Plus Brexit Exit for which I bet few companies and still less the Govt will be well prepared.
So regardless of the source of earnings, I reckon sentiment, and general panic enthusiastically fanned by the media, could send the UK market well down.

Yes that's possible.

Alternatively we could also have a vaccine, virtually no vases of Covid, employment rising, inflation rising, a trade deal with Europe (and one for the US and others on the horizon)...

...with an equity market, like many other places globally, at YTD highs.

I'm not clever enough to know which of these scenarios, or where in between, the reality will be. Nor would I trust anyone claiming to be clever enough to know either.

[mc2fool]

So this obviously begs the question, exactly why is the UK stock market doing so poorly compared to RoTW?

I assume that by RoTW you actually mean a global cap weighted index, such as tracked by VWRL. However, if we look a little into that we find a bit of a different story.

This chart shows the performance of the US listed Vanguard FTSE All-World ex-US ETF (VEU) vs the S&P 500 (^GSPC) and the FTSE All Share (^FTAS), since the ETF's inception in March 2007. (Chart from https://finance.yahoo.com/chart/VEU)



As can be seen, while the S&P has more than doubled over the period the Rest of the World (VEU, World ex-US) has basically gone nowhere, not even having recovered its pre global financial crisis levels. It's interesting that the divergence starts in 2012, and that the UK does a bit better than the World ex-US (which includes 9.2% UK) from then, but later flattens out and finally drops to the same as the World ex-US this year.

So, really the question that should be begged is, why is the RotW (inc. UK) doing so poorly compared to the US?
Or maybe just, why has the World ex-US done so poorly since the GFC?

Of course, on the US side the FAANGS etc are an obvious answer (albeit not a complete one), and while I can't disagree with some of the previous comments about the UK ("old" sectors, Brexit, etc), they don't explain the rest of the rest of the world, which has done equally poorly. VEU is 39.9% Europe, 27.8% Pacific and 25.4% Emerging Markets, with 16.5% in Japan, 11.7% China, 9.2% UK, 6.4% France, 6.3% Switzerland, etc, etc.

(Yes, VEU is in US$, the indices in points, and all are capital-only. I'm sure we'd all be interested if someone could find the data and put together an equivalent GBP based TR comparison chart [although I doubt it would make much difference to the overall US vs RotW story]. Good luck. )

[1nvest]

This would be total return, but in US$'s



You could download the data and use £/$ data from FRED but the relative distances would remain the same.

In the US Tech's have risen to dominate the index, since 2008 the tech sector ETF versus SPY

is indicating 14.7% annualised versus 8.8%

[Lootman]

the question that should be begged is, why is the RotW (inc. UK) doing so poorly compared to the US?
Or maybe just, why has the World ex-US done so poorly since the GFC?

Of course, on the US side the FAANGS etc are an obvious answer (albeit not a complete one), and while I can't disagree with some of the previous comments about the UK ("old" sectors, Brexit, etc), they don't explain the rest of the rest of the world, which has done equally poorly.

There is a method for quickly determining the effect of FAANG on the performance of the US equity market and that is to instead use the Wilshire 5000 index. The reason being that index reflects the total market cap of US equities. Its current value is about 34,500 indicating that US equities have a market cap of $34.5 trillion.

FAANG/MAGA (to include MicroSoft as well) is about $7 trillion in market cap. Given that the vast majority of that valuation has happened since 2000 you can make a back-of-envelope estimate of how US markets would have done without them this century.

But I think the difference is mostly down to the the broader sector of Tech, and even more so if you include biotech in there. That's probably 30% of the S&P 500 but maybe 3% in most other countries. The only other country that has tech giants is China, not least because it bans US companies, and that has driven China to have the second highest market cap on the planet, overtaking Japan.

The US out-performance that is not attributable to Big Tech probably derives, in my view, from the lighter tax and regulatory structure in the US, which drives innovation and profitability. Along with a global appetite for dollar assets.

And culture. Whilst many countries are suspect about business and profit, the US is resolutely pro-business. As President Coolidge famously said:

"the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world."

[mc2fool]

This would be total return, but in US$'s

Thanks. The story, as expected, is pretty much repeated; the S&P TR has ripped upwards and the RotW TR has more or less gone sideways. I take it the reduced nominal performance of the UK TR (compared to the index, as I posted) is due to measuring in US$; lest we forget at the start of 2008 the £ was at ~$2! Of course, in £ it'd be better but the others would be even better still ... as you say, relative distances would remain the same.

VGT is interesting (I was a bit surprised to see Visa & Mastercard as their 3rd & 4th largest holdings, which led me to this Investopedia article on Why Visa is a Tech Stock -- but let's not get distracted!). Is there any (easy!) way of constructing an S&P 500 ex VGT chart?

[Lootman]

VGT is interesting (I was a bit surprised to see Visa & Mastercard as their 3rd & 4th largest holdings, which led me to this Investopedia article on Why Visa is a Tech Stock -- but let's not get distracted!).

Yes, it's important to define what is meant by being a Tech stock.

As you note Visa & Mastercard are considered tech stocks, not financials, by S&P.

But then Google and Facebook are not tech stocks but rather are in Commucation Services. There is an argument they are really advertising companies.

Again, Amazon is in Consumer Discretionary, and someone could probably argue that Apple should be as well.

But at least when I talk about Tech it is all of those bar Visa & Mastercard. Both of those have also done very well so if you do include them then Tech has done even better.

[hiriskpaul]

Runaway success of the US market has only really happened since the crash. 2003-2007, World ex-US (and UK) significantly outperformed the US market, but lost all the outperformance in the crash, where they did much worse than the US. It is only really the last 9-10 years that the US market has accelerated away. It is definitely not all FAANGs either. I hold USMV (iShares MSCI USA Min Vol Factor ETF) which has performed about the same as the S&P 500 over the 10 years to end July (Benchmark TR 268.25% in USD vs 265.58% for S&P) even though USMV has always been very underweight FAANGs. It does currently hold 1.52% in Microsoft though and IT is the biggest sector, followed by healthcare which has also done well.

The UK has been underperforming World ex-US since June 2016 (I wonder why that might be?), but has been very poor in comparison this year which I still put down to Finance, Oil and IT (lack of).

[mc2fool]

Runaway success of the US market has only really happened since the crash. 2003-2007, World ex-US (and UK) significantly outperformed the US market.

Interesting ... know of a reference we can look at, e.g. a ticker we can chart to see the pre 2008 comparisons? The Vanguard All World ex US ETF was all I could come up with on a (admittedly brief) search, and that starts in 2007.

[JohnW]

https://www.msci.com/www/fact-sheet/msc ... x/05833511
Does that do it?

[mc2fool]

https://www.msci.com/www/fact-sheet/msci-world-ex-usa-index/05833511
Does that do it?

Thanks, but I was hoping for something that went back further than just 2005, and something that I could put into a chart up against the S&P and FTSE, as I did above. (iShares US does have an ETF for that index but it starts in 2008, after the Vanguard one a year earlier). Interesting what the link does show though.

[1nvest]

Runaway success of the US market has only really happened since the crash. 2003-2007, World ex-US (and UK) significantly outperformed the US market.

Interesting ... know of a reference we can look at, e.g. a ticker we can chart to see the pre 2008 comparisons? The Vanguard All World ex US ETF was all I could come up with on a (admittedly brief) search, and that starts in 2007.

Have this image, but a reverse image lookup leads to dead-ends for me. Fidelity is now a dead link, seekingalpha links are all behind registration required

[mc2fool]

Have this image....

Also interesting! On first glance I can't see any obvious reasons for the periods ... they don't appear to match up with US recessions or party of the president or any obvious events. The US even continued to outperform the RotW during the dot com crash, with the RotW taking the lead after the bottom....

[Lootman]

I remember in around 1990 the US market really hadn't done anything for years. There was very little interest amongst UK investors in putting money to work in US equities. In fact from memory there was only one investment trust back then that invested in the US.

The graph you show bears that out, showing that the period from about 1985 to 1990 was a period of woeful under-performance by the US relative to the rest of the world. This was also the period when Japan's stock market went up and up, only to come crashing down of course starting in 1989.

At the high point the Japanese market was about 40% of global market cap. Anyone who had the foresight to move out of Japan into the US around 1989-1990 would have done very well.

[johnhemming]

Alternatively, however, the Storm is now over, but that has not been recognised by the markets as yet. (or governments)

[1nvest]

At the high point the Japanese market was about 40% of global market cap. Anyone who had the foresight to move out of Japan into the US around 1989-1990 would have done very well.

Yep, the US dropped from near being 75% of the market to being around 25% as Japan rose from little to massive during its Yamaha bikes and Sony Walkman type years. But that turned around and the US rose back to around 50% of global cap weighting whilst Japan declined back down.

Yen per US$ in April 1990 was around 160, in April 1995 it was more like 80. So a Japanese investor paying 180 yen for each dollar in 1990 would have required those dollars to have at least doubled by 1995 just to break-even on number of Yen being held. https://fred.stlouisfed.org/series/EXJPUS

All-US stock just about achieved that And that excludes inflation. Inflation however was relatively light, dropped from around 3% in 1990 down to 0% in 1995

The better place was bonds. 10 year J-Bonds saw 1990 through 1995 gains of

-1.37
14.24
10.11
17.5
-5.3
15.9

... that gained 60% in Japanese Yen terms. Unfortunately for Japanese investors longer dated bonds weren't a option back then - and that would likely have given even better results.

Harry Brown's Permanent Portfolio did OK over the 1972 to 2019 years, over 4% annualised real, but using 50% in 10 year J-Bond rather than 25% in each of a 1 year and 20 year J-Bond barbell (10 year bullet tends to work out much the same anyway).

[1nvest]

Ah-ha! Found a later Fidelity article with similar (updated) chart to the one posted earlier ...

https://www.fidelity.com/viewpoints/inv ... ting-myths

[1nvest]

I don't subscribe to that "Investors who lack international exposure miss out on the world's best-performing stock markets" or similar claims - such as "you have to buy the entire haystack of stocks to capture the few great performers".

The wider you spread, the less you have invested in each. 100 holdings equally weighted where one gains 100% is no different to 10 holdings where one gains 10%.

And some more backwater holdings may often involve large costs, such as very wide spreads and/or withholding taxes.

Sampling tends to work OK, Such that the likes of the Dow 30 stocks can reflect the likes of the S&P 500 stocks.