We published a view of US equity underperformance versus developed markets today on Seeking Alpha. Below are some excerpts:
- The long-term outlook for the MSCI World has improved slightly over the past few months thanks to the retreat in valuations, but real return prospects remain negative.
- The negative outlook masks a divergence between the U.S., where returns are likely to be deeply negative, and the rest of the developed world, where return prospects have turned positive.
- We forecast real returns on the MSCI World to be -2.3% per year over the next decade reflecting U.S. returns of -4.8% and MSCI Ex-U.S. returns of 1.4%.
- This 6.2pp divergence in return prospects between the U.S. and the MSCI World Ex-U.S. reflects the fact that the U.S. has outperformed to such a degree over recent years despite no significant outperformance in the country’s fundamentals.
“We forecast the MSCI World to return -2.3% over the next decade thanks to a 4.9pp valuation reduction, 0.3pp real GDP growth, and a 2.3pp dividend yield. This compares with 6.0% over the past 50 years and over 10% since the March 2009 low. The good news is that the negative outlook is entirely down to the weak S&P500 outlook. We forecast the S&P500 to return -4.8% per year over the next decade with valuation declines vastly outweighing dividend income and real GDP growth. This is in stark contrast to the outlook for the MSCI Ex-U.S. index where we forecast positive real total returns of 1.4% as slight valuation loss should be more than offset by dividend income.”
“The trailing 12-month dividend yields on the S&P500 and the MSCI World Ex-U.S. are 2.2% and 3.9% respectively. However, both of these figures reflect the fact that dividend payments relative to sales and GDP have risen to record levels. We fully expect dividend payouts to decline over the coming years as companies look to repair balance sheets rather than pay out dividends and engage in buybacks. Taking this decline into consideration we get a payout-adjusted dividend yield of 1.7% and 3.3% respectively.”
“This 6.2pp divergence in return prospects between the U.S. and the MSCI World Ex-U.S. may seem extreme but it merely reflects the fact that the U.S. has outperformed to such a degree over recent years despite no significant outperformance in the country’s fundamentals. Over the past 25 years the S&P500 has outperformed the MSCI World Ex-U.S. index by almost three times.”
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