UniSuper cutting US exposure
Trump’s tariffs alter CIO John Pearce’s world view.
UniSuper’s John Pearce manages $150 billion in assets and understandably has a lot on his mind.
In mid-February, he flagged a potential correction ahead, which has proven remarkably prescient. Back then, he said he expected a flat year for equities but wouldn’t discount the possibility of a correction of 10% or more. However, he invested for the long term, and on this basis, he remained optimistic given the growth in the global economy, subdued inflation, strong employment, and the tech revolution:
“… if we do get that correction, UniSuper will be using it as a buying opportunity. We’ve got plenty of cash, and we intend to load up on assets when the price is right.”
Now, he’s not so sure. He says Donald Trump has effectively declared an economic war with his tariff hikes:
“The current crisis, it’s man-made. And it’s made pretty much by a single man. We know what the solution is here, the solution is for rational people to get around and understand the havoc that they have created and get to a sensible compromise. We know what the solution is, and let’s hope that common sense prevails.”
Yet, he’s not banking on it. Pearce says the market has gone into meltdown because of the magnitude and breadth of the tariff increases. China copping whopping tariff rises hasn’t surprised. What has is that few have been spared Trump’s wrath. Even Australia, a staunch American ally, is facing a 10% tariff, and we got off lightly.
Pearce says tariffs are bad for global trade and are a tax on the US consumer. And the reason that markets have plummeting is because the odds of a US recession, and perhaps a global one, have gone up.
What will happen from here?
Pearce foresees a wide range of possible outcomes. At the pessimistic end, there might be a long drawn-out battle. That’s where the likes of Europe and China don’t come to the negotiating table. And we’re already seeing that with China, which has announced retaliatory tariffs.
At the optimistic end, there have been a few countries which have come to the negotiating table. Vietnam says it will cut all tariffs on American imports to zero. And India says it won’t retaliate but expects a bilateral agreement.
Pearce is leaning towards a long drawn-out battle. However, whichever way it goes, a lot of damage has already been done, with companies putting off investments and consumers getting nervous – both of which have already resulted in softening US economic growth.
There are potential positives
Pearce is not all doom and gloom, though. If Europe and China don’t come to the negotiating table, they’ll likely have to stimulate their own economies. We’ve already seen that with Germany, which has announced plans to significantly increase government spending on defence and infrastructure. And China is also making noises around stimulus, which could be positive for economies outside of the US, such as Australia.
Reducing US stock exposure
Pearce admits that he has some big asset allocation decisions to make. Priority number one is what to do with his large exposure to US assets.
Previously, he’d been a believer in American corporate exceptionalism, given its technology strengths. But Trump threatens all of that.
He says UniSuper is questioning its commitment to America and that, “I think we’ve seen peak investment in US assets.”
He expects to reduce US stock exposure “over time”, though now is “not the time to be reducing that exposure”, given how far and fast the market has fallen.
Should you follow suit?
Is it sensible for the average investor to follow John Pearce’s lead and rethink their US stock allocation? I think it is.
Unlike Pearce, I’ve questioned the notion of US market exceptionalism over the past 12 months. Steep valuations, increasing concentration in the Magnificent Seven, record-high corporate profit margins, extreme institutional allocations to US stocks, speculative retail investor behaviour in AI and other tech-related companies, all pointed to a trend that had gone too far. Meanwhile, other countries had been largely left for dead, including Europe and those in Emerging Markets.
The problem is that the US remains expensive versus history, institutions like UniSuper are only just starting to reweight holdings out of America, retail investors remain overloaded with US shares, and corporate margins remain at peak levels.
It’s the latter point where the greatest risk to US equities lies. Corporate margins have been abnormally high for more than a decade, and with the switch away from globalisation, US tech firms could struggle to maintain their high margins.
You can now understand why all the US tech billionaires lined up at Trump’s inauguration in January. Staying close to those in power might ensure that their companies maintain their monopolies and oligopolies. Unfortunately for them, it hasn’t worked out as planned.
If corporate margins mean revert, that will prove a long-term drag on US earnings. Combined with still elevated valuations, it doesn’t paint an optimistic picture for the US market over the next decade.
Meanwhile, other parts of the world remain cheap and countries like Germany are spending big, which could revitalise their economies.
Therefore, the global switch out of US equities into other markets may have only just begun.
