Can the US market continue to trump the rest of the world?

The US has shown unprecedented dominance in stock market terms for many years, and 2024 was no exception. In this latest podcast episode we look at the factors behind this, the composition of returns from various markets for UK investors, and whether the team believes this dominance can continue into 2025. Also, at the genesis of Trump 2.0, how could tariffs – or the threat of them at least – impact investors?

This is a marketing communication. Please refer to the key information document or KID before making any final investment decisions. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. The mention of any particular security or strategy should not be considered as a recommendation. For further information on the Brunner Trust please go to www.brunner.co.uk.

JL: Hello and welcome to the 23rd and latest instalment of Connected Investor, the podcast from the Brunner Investment Trust. I'm Joe Lynam, the BBC World Service presenter and Newstalk Business Editor, and in this podcast, we're going to take a look back on the trading year that was 2024 and what we might expect in 2025. We'll consider which companies may be said to continue to grow over the long term, and of course, we'll ask what all this means for investors in the Brunner Fund. I'm joined, as usual, by the co-lead portfolio manager of the Brunner Investment Trust, Julian Bishop. Hi Julian.

JB: Hi Joe.

JL: How was 2024 for you?

JB: I think for Brunner, just looking back at the year, we've just wrapped up our financial year which ends at November and in absolute terms, you know, a really exceptional, exceptional year. Lags slightly behind our benchmark, sort of failed to keep up with a lot of the bull market and technologies, that cost us a little bit. And then some good news on the discount, so at the start of the financial year, there's about a 15% discount to NAV on Brunner, and now we're trading at a small premium, so that narrowing boosted shareholders' returns about 15% over the year, which more than compensated for our slight underperformance. So, you know, we previously said we'd had 5 years on the trot of outperforming. Didn't make it 6 in a row, unfortunately. But, you know, still a good record.

JL: You said that some of the technology companies surprised you.

JB: Yeah, so, you know, if you look back at 2024, overall, and we're recording this in early December, so the calendar year is not quite over, but really it's been a year and a 2nd year about American exceptionalism, so if you look at the performance of the US market, the S&P 500 so far this year-to-date is up in pounds, about 27%. And the European index is only up 4%. It's a huge, huge difference. And 27% in the US needs to be put in the context of profit growth, for the US market of only 8%. So essentially, you're just paying more now for $1 of profit than you would have been previously. So, the valuations in the US have expanded hugely, and a lot of that has happened, not exclusively, but a lot of it has happened in the technology sector. So, the US market increasingly dominated by, you know, the famous magnificent seven tech giants, such as, you know, Google, Amazon, Tesla, Meta, Microsoft, etc. But increasingly, Nvidia, which has been the company that added the most market cap over the last year, that's one which we chose not to hold, and we can talk a little bit about that if you like. So, whilst we had other tech names, we have a big weight in a company called Taiwan Semi, which we've mentioned before. That doubled over the course of the past year, and we had some other names that sort of play into this tech and AI theme. We didn't quite keep up with the broader market there.

JL: Do you think that 2025 will be a repeat, i.e., American markets storming ahead and European equities soft?

JB: You know, always hard to tell in a single year, and we tend to shy away from making sort of single-year forecasts because you know, in the short-term you might have things like profit recessions, you might have multiple contraction that can cause the equity market to take a step backwards, so we try and sort of think about the long-term reasons why equities tend to deliver good returns over the long run, which is generally the combination of cash returns and earnings growth. We see both of those things being positive, you know, Brunner owns lots of cash generative companies that tend to return that money. They tend to grow as well, so we're sort of confident on that side. And at the moment, we have about, you know, very approximately about 50% of the fund of the trust in the United States, about 25% in the UK, 20% in Europe, and 5% elsewhere. So, we do think about the direction of travel for regional markets, but generally, we're looking at the stock level and thinking about the investment cases on a sort of individual level. But the one thing we would note is that there has been a huge, huge divergence in the performance and valuation of US companies versus Europe. So, I personally think it's indisputable that the calibre of businesses in America is better than it is in Europe, you know, the tech sector is almost exclusively American, you know, the mega-cap tech sector, I think there's a statistic, remarkable statistic like America has 13 $100 billion value companies that have been established in the last 30 years. Europe has none, you know, it's a very stark…

JL: Not a single one,

JB: It's a very stark difference. So, outside America, there's the odd gem - there's Taiwan Semi in Taiwan, there's ASML in the Netherlands, which makes the equipment used to manufacture semiconductor chips, but there is a big difference between the composition and the markets. Now, that means that the US deserves, I think, to trade at a premium just based on the composition of the index, more of these world-class growth businesses. But you can stretch that argument too far, and I think now, if you look at the starting multiples, so sort of just a very basic valuation for the US market, and compare it to, say, the UK, the difference is really, really stretched, so we're talking about a sort of PE forward of about 22 times for the S&P now, compared to about 11 for the UK, so twice as much. That makes American markets handicapped going forwards. And whilst we would expect the composition of returns to be different going forwards, i.e., in the UK and in Europe, you'd expect to get more of your return from dividends, rather than growth. You know, we think increasingly, Europe and the UK will have their time in the sun, and we think the next decade will be very different from the last 10 years. And in fact, when we look back over the last 10 years, you look at US markets, and the reason that they've outperformed so much for UK-based investors. A lot of it's driven by superior earnings growth in American markets. But the dividends there are very low, and a lot of the outperformances come from the valuation increasing, which probably won't repeat. A lot of the outperformances come from sterling weakening against the dollar, which probably won't repeat. A lot of earnings growth in the States came from Trump's first-term corporate tax cut, which is very large. That probably won't repeat. So, there's a lot of one-off reasons, we think, that won't repeat, which means that looking forward, there'll probably be a bit more of a level playing field, even though the composition of returns in the UK and Europe will be a bit different from that in the US, with far more coming from the dividend rather than from earnings growth.

JL: We know that Trump 2.0 is on its way, and we know that Donald Trump has never hidden his love of tariffs as a weapon. How do investors place themselves in a world of potential tariff wars?

JB: Well, the market's response so far has been very clear. So, if you look, since the, you know, surprisingly convincing win of Trump in the US elections, there has been a really, I'd say virtually unprecedented, divergence in the performance of the US markets versus European. So, I don't know the exact numbers, but roughly, you know, I think US markets are up 10% and Europe's sort of flat or down 1 or 2%. Yeah, which is pretty remarkable when you consider that a lot of these businesses are multinational anyway and have a lot of business in Europe or in the US. So, the market sort of voted with the view that this is good for America. You know, America first, and simultaneously, it's bad for the rest of the world. Our sort of take on it is that whilst he's using some very muscular language with regards to tariffs, for example. I mean, clearly is very pro-tariff, he has to be extraordinarily careful when deploying these tariffs because ultimately, if you're putting a tariff on goods imported from China, and let's not forget that the US imports a massive amount from China, there's an incredible interdependency between the two economies. If Trump imports lots from China, a lot of those tariffs will then be passed on to the consumers in the form of higher prices. So does Trump really want to have people, you know, assembling iPhones in the States or manufacturing, you know, Nike shoes in the States where obviously that is much better done in a lower cost labour location like China or Vietnam? So, the risk is that this will be inflationary. I think part of the reason that Trump won so convincingly is because there has been inflation in America, that a lot of American consumers regard as having eaten into their disposable incomes, and it has. So, the last thing he should do is pursue an agenda that is inflationary. So, I would hope and expect that with time, he would water down his language. I'm sure it's an opening gambit to negotiations with third parties, you know, time will tell. But when we look at European businesses, for example, I think the statistic is something like European businesses, you know, they have 20% of their business in North America. That might be a slight understatement. But a lot of that business is undertaken locally, so they're manufacturing locally in the US for the American market. They're not physically exporting goods. So, actually, the impact on tariffs on America - on European businesses - sorry, should be, I think reasonably limited, and we would expect some of this very belligerent language to be watered down with time.

JL: Anything else in 2025 that we should keep an eye on?

JB: Yeah, I think you know we sort of point out just the huge divergence and valuations between, you know, tech, US, and many other sectors. So that's one thing that is to be borne in mind, and I think really a great advocate for a sort of balanced approach as we have. And you know, if you look at the global index now it's approaching 70% is in the US. So the global index is really a US index and at Brunner we have a slightly different benchmark, so we have 30% of our benchmark is the UK, so that automatically tilts us towards some of the better value on offer in the UK and European markets, where multiples are far less excited and where there's far more cash flow and far higher dividends. So, the dividend yield now in the UK, for example, is almost quadruple that in the United States. So, I think that's one thing to keep an eye on, you know, can the US keep going? Can valuations in the US keep on expanding. We think there's risk there, personally. One good example, by the way, is Walmart. So, Walmart's the biggest, biggest retailer in the world. The American Giant. The PE multiple on Walmart now is about 35 times. That's very, very high. You compare that to Tesco in the UK on 12 times and the business growth outlooks aren't that dissimilar, you know, it's an extraordinary difference that makes us sort of think, oh, let's, you know, tilt some money towards Europe and the UK. But other things to keep an eye on, I think China is… you know, there's expectations, I think for a recovery in China, but the property market there is in real trouble, and, you know, we've seen in Europe and in the US, what a property bubble can do to an economy. Joe, you're in Ireland, you know, Ireland was, very badly affected by having a property bubble and we think there's a similar situation in China. There seems to be expectations that China's had their problems and now they've recovered. We're a bit more cynical about that. So that's one thing to keep an eye on. And then I think finally can AI live up to the enormous hype that surrounds the sector. And we have no doubt that AI will do amazing things, you know, it's an incredible technology. But there's a tremendous amount of hype. There's a tremendous amount of speculative investment in that area. There’s a lot of investors in the US who just are putting money to work without really thinking, I think, about the fundamentals in the long-term. Who may come to rue their decisions, but that's one thing to keep an eye on. You know, how cyclical will the AI industry be with all these people who are investing literally hundreds of billions of dollars in AI data centres to be able to get a good return on their investment. That's another key question for 2025, I think.

JL: You mentioned PE ratios there, Julian. Can you just explain for us what a PE ratio is?

JB: Yeah, yeah, sure. So, we're, sorry, operating in a world with a lot of jargon. So, PE ratio, stands for price to earnings, and, if you think about it, the earnings of this year's one year's profit and the price is the value of the share or the value of the company. So, it's the ratio of how much the company is worth versus this year's profit. So, you know, typical range would be maybe 10 for a sort of relatively low growth company to maybe, you know, 30 for a very highly regarded growth company. And really, it's just a multiple of one year's profit you're paying to buy an investment today. So, it takes into consideration lots of things, like the future growth of the company, the risk of the company, interest rates, etc. so there's a lot of things that feed into that calculation. But basically, it's a sort of shorthand for valuation that is widely used.

JL: That's a pretty decent definition to me, and a good point to leave it. Julian, thank you very much. That's Julian Bishop, the portfolio co-lead of the Brunner Investment Trust. That's all the time we have for in this episode of Connected Investor, make sure you're subscribed to the Connected Investor wherever you get your podcast, so you don't have to go hunting for it next time. And thank you for listening. We value your views and we're keen to know what you think, so do get in touch. You can contact us via the website brunner.co.uk and if you could also leave a review, and give us a rating wherever you get your podcast, that would be great as well. So, from Julian Bishop and me, Joe Lynam, ta ta for now.