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Liberation Day: Time to dump US stocks? by Rita Silvan, CIM Investing in American securities used to be like buying a "Little Black Dress" (LBD). The LBD is a wardrobe staple. When you don't know what else to do or are too chicken to be daring, the LBD is the default option. No one will mock you as a fashion victim for wearing it. Likewise, no portfolio manager has lost their job for betting on the US. It's the fail-safe choice that never goes out of style. Or does it? Like Malibu Barbie, America has always promised an endless summer of affluence and good times. The rule of law, a resilient democracy, and a dynamic business culture, together with the tailwinds of globalization and the world's reserve currency, have generated immense wealth for generations of Americans and foreign investors alike. Despite its past and current challenges, America is deemed "too big to fail". Yet, it pays to pay attention: the citizens of Rome and passengers on the Titanic probably felt the same way. Students of history may conclude that it's better to leave the party too early than stay too long. Today, in place of American exceptionalism, the world is bearing witness to, as Nobel economist Paul Krugman wrote on Substack, the Third-Worlding of America. The Rule of Law is swiftly being replaced by rising authoritarianism and the country is run by a leader who is a convicted felon, twice impeached president, and an accused molester of women and girls. His erratic policies, inflammatory pronouncements, and demented demeanour do not instill confidence among key trading partners and sovereign and institutional investors. Frank Sinatra supposedly said, "orange is the happiest colour". Alas, no more. Reassessing Risk: The 'Moron Premium' Since Donald J. Trump became president (again), the US economy has underperformed global peers. In May, Moody's downgraded the country's credit rating from triple-A. Treasuries rose to 5 per cent, a psychologically significant level. In late July, official data showed that during the past quarter, job growth was the lowest since 2010 (except during the 2020 pandemic). Trump promptly fired the head of the agency that produced the alarming report. Even the Mag 7 which gained more than US$4.5 trillion during Biden's term, have taken it on the collective chin losing more than US$2.7 trillion in DJT's first 100 days in office, despite tech CEOs showering the incoming president with compliments and cash. For the past 15 years, retail investors have been primed to 'buy the dip'. This has worked out well as markets have snapped back, sometimes very fast. Most recently, on the cusp of DJT's announcement in April of "Liberation Day" - massive worldwide tariffs on trading partners - nearly US$6.6 trillion was erased from US stock valuations. Once again, retail investors provided liquidity and smoothed volatility. Despite the recent melt up, individual investors appear to believe that it's nothing but blue skies ahead. However, among the professional class, the new mantra is not "buy the dip" but "sell the rip". When offered a suitable exit point, they are reducing exposure to the US. Large global funds are the whales of the financial world. They are slow to shift but once they do, their actions cause major waves that are not easily reversed. The question becomes not whether to reallocate away from the U.S. but how to do it, for example, by reducing US capital inflows (a "buyers' strike") or actively disinvesting. This is the start of the Great Rotation. It is "not pretty" for the US, as Deutsche Bank UK Head of FX Research George Saravelos recently told The Financial Times Global sovereign and institutional investors in Asia, Europe, U.K, and Canada are waking up and smelling the Americano causing them to re-evaluate their US allocations. It is estimated that at least 50 per cent of foreign savings are in US assets. The popularity of passive investing alongside the rapid share price growth of American companies has meant that global equity index funds are heavily skewed to the US. Asian and European investors are not the only ones with outsized US positions, Canadians are also big owners of US securities. According to the most recent report from Statistics Canada, since 2014, our exposure to the U.S. markets has grown from $823.7 billion to $3,044.8 billion, a 270% increase. U.S. securities including equities, debt securities, and Treasury bonds represent 73% of all foreign securities owned by Canadian investors (2024). Essentially, Canada recycles capital from the trade surplus back into the US market! Another risk factor for Canadian investors is the potential for future retaliatory taxes on US assets held in non-registered and registered investment and savings accounts. The Revenge Tax provision (Section 899) was shelved in June due to pressure from Wall Street which successfully argued it would deter foreign investment and harm U.S. businesses. If it had gone ahead, it would have added 5 per cent to the withholding tax each year for four years (20%) on types of U.S. income for foreigners whose countries impose what the administration deems are "discriminatory taxes" on U.S. citizens or corporations. Read the room In addition to a shambolic US administration, there are other risk factors to consider:
Liberation Day America is facing real problems, some of them self-manufactured by the current administration. It is not a stretch to think its best years may be in the rear-view mirror as institutions buckle and talent and capital seek greener pastures. However, the wheel of fortune turns very slowly, and it is far too early to count the U.S. out entirely. The country is still home to some of the most dynamic and shareholder friendly businesses and its citizens tend to be optimistic and entrepreneurial. If the rule of law holds out, America is likely to thrive for many years to come. Nevertheless, prudent investors should plan for the longer term. Is America likely to be in better shape - socially, politically, economically, environmentally - in 10-20 years than it is today? What is the optimum allocation to the US versus other more promising geographies that invest heavily in education, healthcare, and protecting the environment? Could 15-20% of the Vanguard S&P 500 ETF (VOO) at 3 bps do the job and still leave enough capital to invest elsewhere? For Canadians, repatriating some portion of their US assets could make those dollars go further. Canadian companies tend to be more generous dividend payers than US companies, and the dividends are not subject to a withholding tax leaving more in savings and investing accounts to compound over time. To gain more international exposure, passive investors could consider ETFs tracking developed markets, ex-US, such as Vanguard's FTSE Developed All Cap ex U.S. Index ETF (VDU). Vanguard is a U.S.-based company (natch), but, on the flip side, fees are low, and liquidity is high. After several years of back-to-back 25-per-cent plus returns, driven mostly by technology-stock outperformance, it may be emotionally difficult to liberate your portfolio from an overdependence on the US. Many of us are in the same boat. Heed the words of Benjamin Graham: Investors should aim for security of principal and an adequate return. As investors, it's our job to decide how best to accomplish this in a rapidly changing world. About Rita Silvan Rita Silvan, CIM, is a financial writer and public speaker who specializes in women and investing. She has appeared on BNN Bloomberg, CBC Newsworld, conference panels, and other media outlets. She is the former editor-in-chief of ELLE Canada magazine and Golden Girl Finance and is a regular columnist for Canadian Moneysaver Magazine. |
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