— Sep 25, 2019


Despite the recent evidence of softening in the US economy and continuing US v China trade tensions and tariffs, US equities have now pretty much returned to their previous highs. This is in sharp contrast to the rest of the world, where most stock markets remain well below their prior peaks.

The argument being made is that this is due to the US indices containing many of the world’s leading growth success stories, with stocks like the FAANG’s (Facebook, Apple, Amazon, Netflix, Google) and newer ones including Uber, Lyft, Snapchat and also WeWork (which was set to float with a suggested valuation of between $15bn and $47bn – for what it is worth we believe the equity in WeWork is worth precisely $0 and it seems the market agrees with us as the float has just been cancelled).

However, whilst we believe there is some merit to this argument, as Warren Buffet famously said “You pay a high price for a cheery consensus”.

There is a price for everything, and the prices of such businesses (good as they may be) look far too rich for our blood.

One only has to remember the experience of the tech boom, where so many stocks were lauded as great growth companies only in many cases to see their stocks never reach such heights again (or for those that did, it was not for many years).

This is where experience is invaluable: the largest age cohort of financial services employees in the US is now apparently 25-34 year olds. This means that many advisors and investment managers in the US have only been through one bear market, the financial crisis of 2008/9, and thus have become used to the idea that central bankers have your back and will always intervene and to a stock market where momentum is the only strategy game in town. These circumstances, however, are not the norm, as anyone who has lived through markets since the 1980s can attest to.

Mr Buffett has continued to extol the virtues of the US as a great country to invest in for the long term but one has to remember that, as one ardent follower put it recently, he is 89 and people at that age tend to want to die with friends rather than enemies.

It is interesting though to follow his actions which provide a starker picture; that perhaps he too thinks the US market is overvalued. Berkshire Hathaway, his investment company, now sits on a record $122 billion dollars of cash. In other words, he has not been able to find anything of substantial size to buy that meets his valuation criteria since his last major deal worth $37bn in early 2016.

By contrast, it seems at present that no one wants to be invested in the UK market as outflows continue and most money managers are underweight the UK stock market, despite it still being the 6th largest in the world by market value and containing many leading global companies.

The reasons are not difficult to find at present, with a possible recession coming and the never ending Brexit saga and accompanying political turmoil.

Nevertheless, generally the best time to own an asset class is when everyone else does not. To us UK prices look to have more than discounted such issues and so we remain underweight the US and very positive on the medium to long term prospects (and overweight) for the UK. We have also built up cash reserves to nearly 10% to provide us with additional protection against whatever this period of uncertainty brings.