Towards a change in thematic leadership on the stock market?

In 1980, nine of the ten biggest market-cap companies globally were based in the US. Six of them were oil producers. That year, inflation finally peaked after a 15-year upward trend, as the US oil majors succeeded in halting the steady rise in oil prices thanks to their hefty investments in exploration capacity in previous years.

In 1990, the Japanese economy had just experienced a spectacular rebound and was caught up in one of the biggest-ever property and asset-price bubbles. Office space was selling at times over $200,000 per square metre; all Tokyo-listed companies were trading at P/E ratios of above 60; and the most beautiful Van Goghs hung on the walls of Japanese banks and billionaire mansions. Eight of the ten biggest market-cap companies globally were Japanese, and six of them were banks.

In 2000, the internet was entirely “made in America” and was inspiring people the world over. Investors priced dot-com companies as a multiple of expected medium-term revenue. Of the ten biggest market-cap companies globally, seven were American – including four in the tech sector – two were Japanese, and one was a German telecoms firm. However, tech stocks across the board experienced major losses in the subsequent three years. Amazon shed 95% of its market value before bouncing back to become the behemoth it is today. And does anyone remember Lucent Technologies, the ninth biggest market-cap company at the time but now an absorbed entity of Nokia?

In 2010, China seemed on track to become the world’s leading economy; one of its oil companies and two of its banks were in the top ten by market cap. But as the decade wore on, emerging markets slid into a long period of under-performance relative to the developed world – a trend that continues today.

In 2020, and still in 2023, US tech companies once again dominated global equity markets. This time, artificial intelligence was behind the dynamic; only TSMC of Taiwan and Tencent of China were able to claim a place among the US giants, albeit at the bottom of the league table.

As our friends at Gavekal Research¹ have pointed out, these decade-long cycles consist of an alternating pattern of leadership between companies based in the US vs the rest of the world, and between growth-oriented vs value-oriented (i.e. more cyclical) investment themes. This suggests that the next group of companies to reach the top won’t be from the US and will operate in cyclical sectors. On that basis, under what scenario could we see a handful of non-US value stocks rise to the top of global equity markets by the end of the decade?

To answer this question, we need to look back to 1972. That was peak year for the Nifty Fifty² – a group of 50 US growth stocks that had substantially outperformed other US-listed firms since the late 1950s (except for a sharp correction at the end of the 1965–1969 inflationary period). These companies’ supremacy came to an abrupt end with the 1973 oil crisis and subsequent resurgence of inflation. If we compare the Nifty Fifty of the 1960s with the Big Tech³ companies of the 2010s, the 1965–1969 inflationary period that impacted the Nifty Fifty with the 2020–2022 one that impacted Big Tech in 2022, and the 1969–1972 rally in the Nifty Fifty with the 2023–2024 rally in Big Tech, then an interesting parallel emerges.

This parallel suggests the next step will be a resurgence of inflation, which could bring about a change in leading investment themes along the alternating pattern between the US vs rest of the world and growth vs value stocks. A second bout of inflation could deflate today’s lofty valuations through its knock-on effects on long-term interest rates, and would affect the US market in particular since it’s home to the majority of non-cyclical growth companies and stretched valuations.

Factors like Japan’s reawakening, China’s expected rebound, India’s faster pace of economic growth, excessive fiscal spending in the US, and the tricky energy equation could favour investment themes and regions that offer an alternative to US mega caps in the broader tech sector, while also adding to the inflationary pressure.

The US government’s excessive spending is also weakening the dollar, which could push up the USD prices of non-US equities. But we aren’t yet ready to conclude that these foreign companies will surpass the US mega caps by decade-end, especially since the US giants have the advanced technology and sound financial footing to withstand (under enviable conditions) the global slowdown that lies ahead.

A second bout of inflation could very well occur, and we believe it’s sufficiently likely and would have a big enough impact to warrant being factored into our overall portfolio strategy. We will do this by gradually diversifying on both geographical and thematic level towards “old economy” sectors and “forgotten” regions of the world. We humbly believe that time – and specifically the turn of the next decade – will tell whether this kind of portfolio diversification based on a cyclical pattern that’s fairly well established, albeit with mysterious underlying mechanisms, was a wise choice.