Good morning and Happy Father’s Day to all the fellow Dads out there. It’s also the day of the Montreal Grand Prix and hopefully many of you are enjoying it in person or at least on a comfortable couch.
There Is No Alternative
Margaret Thatcher became the U.K. Prime Minister in 1979 and began a period of immense change across the UK and the globe. She coined a phrase, “There Is No Alternative” (TINA) which lives on today in many forms. Mrs. Thatcher believed in free markets and deregulation, pushing her agenda throughout her multiple terms. Through her time in power, markets became less regulated, and the free markets were left to decide on capital allocation decisions. To quote Margaret Thatcher “There is no such thing as public money; there is only taxpayers’ money.”
U.S. Equities and TINA
Fast forward to a few years ago and the phrase, TINA, began popping up in the media as a reference to there being no alternative but investing in U.S. equities and in particular, to U.S. technology stocks. If investors were expected to earn excess returns, then TINA was the way to do it. However, today it feels like we are seeing a turn in the market narrative and hence my poor pun, “TINA Turner”. Today, there are alternatives across geography, stores of value, and style of investing.
Foreign Affair
Tina Turner released Foreign Affair in 1989 and that cassette was often blasting from my Mum’s car radio. Today, the markets may be starting a foreign affair of their own. I see 3 secular forces that could make international markets more appealing than U.S. over the next few years:
Technical: Given the U.S. imports over $1 trillion more of goods and services than it exports each year, there is a mirroring flow back in the form of capital. In effect, the U.S. needs to sell $1 trillion of assets per year to finance their foreign expenditures. Those flows have moved into U.S. Treasuries, equities and other assets. However, with tariffs and a weakening U.S. Dollar, the trade imbalance is shifting, therefore slowing the capital inflows.
Sentiment: U.S. equities make up approximately 50% of the global market capitalization and account for up to 70% of many leading global equity indices. Recent policy changes from the U.S. administration are unlikely to improve foreign sentiment towards their markets. Put yourself in the shoes of a Spanish pension fund manager. What are you comfortable proposing to your board? We expect to see a gradual secular shift away from U.S. equities and bonds, shifting allocations to either domestic markets or other parts of the world.
Valuation: U.S. companies have shown stronger than average earnings growth, therefore earning a higher valuation multiple from investors. Today, the spread of broad valuation metrics shows that the U.S. is trading at high levels relative to trading partners and emerging markets. It seems likely this will play a role in future allocation decisions.
Private Dancer
Private Dancer is one of the classic Tina Turner anthems. The album was released in 1984, with the title song penned by Mark Knopfler, of Dire Straits fame. Today investors are seeing many other avenues to access alternative investment strategies including private equity and private credit. Over 80% of the companies in the United States, with over $100M in revenue, are private companies. Lending and buying these companies open investors up to a much wider opportunity set than solely focusing on public or traditional markets.
Private debt is largely a floating rate of interest strategy. With interest rates in the U.S. remaining high, investors can generate strong absolute returns by lending to private companies. Private credit, as an investment strategy, became more common due to the increased bank regulation imposed from 2009 onwards.
Within private equity there is a growing opportunity to supply liquidity to those investors currently overweighted in private assets. The secondary market allows market participants to enter these mature portfolios or single opportunities at a discount.
Goldeneye
Tina Turner belted out the tune to the hit James Bond movie of the same name in 1995. The song, written by Bono and The Edge, was a smash hit alongside the film. So far this year, the markets have also focused on alternative stores of value. The U.S. Dollar has been the champion in terms of the global reserve currency since the end of World War II. However, following 3 years of losses for U.S. Treasury holders and a depreciation in the Dollar this year, investors are looking to alternate stores of value.
A store of value should play the role of preserving the purchasing power of a consumer. When times get difficult, funds tend to flow into stores of value to protect investors from inflation and other macro risks. This year we have seen foreign investors sell U.S. assets and therefore selling U.S. Dollars. Those funds have flowed into other safe havens such as Swiss Francs (+10% versus U.S. Dollars YTD), Euros (+10% YTD), and the Japanese Yen (+8.5% YTD). Participants have also purchased Bitcoin and the Daddy of the safe haven trades, gold (+25% YTD).
All in all, there are many alternatives out there today. As for the late and great Tina Turner, you were Simply the Best!
