Global

Investors should go long US treasuries and stay overweight defensive versus cyclical sectors, large caps versus small caps, and aerospace/defense stocks. Regionally we favor the US, India, Southeast Asia, and Latin America, while disfavoring China, Taiwan, Hong Kong, eastern Europe, and the Middle East.

This week’s <i>Global Investment Strategy</i> report titled Fourth Quarter 2022 Strategy Outlook: A Three-Act Play discusses the outlook for the global economy and financial markets for the rest of 2022 and beyond.

Executive Summary For the first time in a decade, it is much less attractive to buy than to rent a home. In both the UK and US, the mortgage rate is now almost double the average rental yield. To reset the equilibrium between buying and renting a home, either mortgage rates must come down by around 150 bps, or house prices must suffer a large double-digit correction. Or some combination, such as mortgage rates down 100 bps and house prices down 10 percent. In the US, a 10-year upcycle in housing investment has resulted in overinvestment relative to the number of households.  Falling house prices coming hot on the heels of a combined stock and bond market crash will unleash a deflationary impulse in 2023, which will return economies to 2 percent inflation. This reiterates our ‘2022-23 = 1981-82’ template for the markets. A coordinated global recession will cause bond prices to enter a sustained rally in 2023, in which the 30-year T-bond yield will fall to sub-2.5 percent. Meanwhile, the S&P 500 will test 3500, or even 3200, before a strong rally will lift it through 5000 later in 2023. It Now Costs Twice As Much To Buy Than To Rent A UK Home! It Now Costs Twice As Much To Buy Than To Rent A UK Home! It Now Costs Twice As Much To Buy Than To Rent A UK Home! Bottom Line: Falling house prices coming hot on the heels of a combined stock and bond market crash will unleash a deflationary impulse in 2023, which will return economies to 2 percent inflation. Feature Mortgage rates around the world have skyrocketed. The UK 5-year fixed mortgage rate which started the year at under 2 percent has more than doubled to over 5 percent. And the US 30-year mortgage rate, which began the year at 3 percent, now stands at an eyewatering 7 percent, its highest level since the US housing bubble burst in 2008. This raises a worrying spectre. Is the recent surge in mortgage rates about to trigger another housing crash? (Chart I-1 and Chart I-2). Chart I-1UK Mortgage Rate Has Doubled UK Mortgage Rate Has Doubled UK Mortgage Rate Has Doubled Chart I-2US Mortgage Rate Has Doubled US Mortgage Rate Has Doubled US Mortgage Rate Has Doubled A good way to answer the question is to compare the cashflow costs of buying versus renting a home. This is because home prices are set by the volume of homebuyers versus home-sellers. If would-be homebuyers decide to rent rather than to buy – because renting gets them ‘more house’ – then it will drag down home prices. Here’s the concern. For the first time in a decade, it is much less attractive to buy than to rent a home. In both the UK and US, the mortgage rate is now almost double the average rental yield. Put another way, whatever your monthly housing budget, you can now rent a home worth twice as much as you can buy (Chart I-3 and Chart I-4). Chart I-3It Now Costs Twice As Much To Buy Than To Rent A UK Home! It Now Costs Twice As Much To Buy Than To Rent A UK Home! It Now Costs Twice As Much To Buy Than To Rent A UK Home! Chart I-4It Now Costs Twice As Much To Buy Than To Rent A US Home! It Now Costs Twice As Much To Buy Than To Rent A US Home! It Now Costs Twice As Much To Buy Than To Rent A US Home! The Universal Theory Of House Prices Buying and renting a home are not the same thing, so the head-to-head comparison between the mortgage rate and rental yield is a simplification. Buying and renting are similar in that they both provide you with somewhere to live, a roof over your head or, in economic jargon, the consumption service called ‘shelter’. But there are two big differences. First, unlike renting, buying a home also provides you with an investment whose value you expect to increase in the long run. Second, unlike renting, buying a home incurs you the costs of maintaining it and keeping it up-to-date. Studies show that the annual cost averages around 2 percent of the value of the home.1 So, versus renting, buying a home provides you with an expected capital appreciation, but incurs you a ‘depreciation’ cost of around 2 percent a year. Which results in the following equilibrium between buying and renting: Mortgage rate = Rental yield + Expected house price appreciation - 2 But we can simplify this. In the long run, the price of any asset must trend in line with its income stream. Therefore, expected house price appreciation equates to expected rental growth. Also, rents move in lockstep with wages (Chart I-5). Understandably so, because rents must be paid from wages. And wage growth itself just equals consumer price inflation plus productivity growth, which averages around 1 percent (Chart I-6). Pulling all of this together, the equilibrium simplifies to: Chart I-5Rents Track Wages Rents Track Wages Rents Track Wages Chart I-6Rent Inflation = Wage Inflation = Consumer Price Inflation + 1 Rent Inflation = Wage Inflation = Consumer Price Inflation + 1 Rent Inflation = Wage Inflation = Consumer Price Inflation + 1 Mortgage rate = Rental yield + Expected consumer price inflation - 1 So, here’s our first conclusion. Assuming central banks achieve their long-term inflation target of 2 percent, the equilibrium becomes: Mortgage rate = Rental yield + 1 Under this assumption, to justify the current UK rental yield of 3 percent, the UK mortgage rate must plunge to 4 percent. But given that the government has just triggered an incipient balance of payments and currency crisis, the mortgage rate is likely to head even higher. In which case the rental yield must rise to at least 4 percent. Meaning either house prices falling 25 percent, or rents rising 33 percent. Meanwhile, to justify the current US rental yield of 3.7 percent, the US mortgage rate must plunge to 4.7 percent. Alternatively, to justify the current mortgage rate of 7 percent, the rental yield must surge to 6 percent. Meaning either house prices crashing 40 percent, or rents surging 60 percent. More likely though, all variables will correct. The equilibrium between buying and renting will be re-established by some combination of lower mortgage rates, lower house prices, and higher rents. The Housing Investment Cycle Is Turning Down The relationship between buying and renting a home raises an obvious counterargument. What if central banks cannot achieve their goal of price stability? In this case, expected inflation in the equilibrium would be considerably higher than 2 percent. This would justify a much higher mortgage rate for a given rental yield. Put differently, it would justify rental yields to stay structurally low (house prices to stay structurally high), even if mortgage rates marched higher. In an inflationary environment, houses would become the perfect foils against inflation. In an inflationary environment, houses would become the perfect foils against inflation because expected rental growth would track inflation – allowing rental yields to stay depressed versus much higher mortgage rates. This is precisely what happened in the 1970s. When the US mortgage rate peaked at 18 percent in 1981, the US rental yield barely got above 6 percent (Chart I-7). Chart I-7In The Inflationary 70s, The Rental Yield Remained Well Below The Mortgage Rate... In The Inflationary 70s, The Rental Yield Remained Well Below The Mortgage Rate... In The Inflationary 70s, The Rental Yield Remained Well Below The Mortgage Rate... If the market fears another such inflationary episode, would it make the housing market a good investment? In the near term, the answer is still no, for two reasons. First, even if rental yields do not track mortgage rates higher point for point, the yields do tend to move in the same direction – especially when mortgage rates surge as they did in the 1970s (Chart I-8). Some of this increase in rental yields might come from higher rents, but some of it might also come from lower house prices. Chart I-8...But Even In The 70s, The Rental Yield And Mortgage Rate Moved Directionally Together ...But Even In The 70s, The Rental Yield And Mortgage Rate Moved Directionally Together ...But Even In The 70s, The Rental Yield And Mortgage Rate Moved Directionally Together Second, based on the US, it is a bad time in the housing investment cycle. Theoretically and empirically, residential fixed investment tracks the number of households in the economy. But there are perpetual cycles of underinvestment and overinvestment – the most spectacular being the overinvestment boom that preceded the 2007-08 housing crisis. US housing investment has just experienced a 10-year upcycle in which it has overshot its relationship with the number of households. Therefore, contrary to the popular perception, there is not an undersupply of homes, but a marked oversupply relative to the number of households. (Chart I-9). This is important because, as the cycle turns down now – as it did in 1973, 1979, 1990, and 2007 – the preceding overinvestment always weighs down housing valuations (Chart I-10). Chart I-9The US Housing Investment Cycle Has Moved Into Overinvestment The US Housing Investment Cycle Has Moved Into Overinvestment The US Housing Investment Cycle Has Moved Into Overinvestment Chart I-10A Housing Investment Downcycle Always Weighs On Housing Valuations A Housing Investment Downcycle Always Weighs On Housing Valuations A Housing Investment Downcycle Always Weighs On Housing Valuations The Investment Conclusions Let’s sum up. If the market believes that economies will return to price stability, then to reset the equilibrium between buying and renting a home, either mortgage rates must come down by around 150 bps, or house prices must suffer a large double-digit correction. Or some combination, such as mortgage rates down 100 bps and house prices down 10 percent. If the market believes that economies will not return to price stability, then house prices are still near-term vulnerable to rising mortgage rates – especially in the US, as a 10-year upcycle in housing investment has resulted in overinvestment relative to the number of households.  US housing investment has just experienced a 10-year upcycle in which it has overshot its relationship with the number of households. Falling house prices coming hot on the heels of a combined stock and bond market crash will unleash a deflationary impulse in 2023, which will return economies to 2 percent inflation – even if the markets do not believe it now. This reiterates our ‘2022-23 = 1981-82’ template for the markets, as recently explained in Markets Still Echoing 1981-82, So Here’s What Happens Next. In summary, a coordinated global recession will cause bond prices to enter a sustained rally in 2023, in which the 30-year T-bond yield will fall to sub-2.5 percent. Meanwhile, the S&P 500 will test 3500, or even 3200, before a strong rally will lift it through 5000 later in 2023. Analysing The Pound’s Crash Through A Fractal Lens Finally, the incipient balance of payments and sterling crisis triggered by the UK government’s unfunded tax cuts has collapsed the 65-day fractal structure of the pound (Chart I-11). This would be justified if the Bank of England does not lean against the fiscal laxness with a compensating tighter monetary policy. But if, as we expect, monetary policy adjusts as a short-term counterbalance, then sterling will experience a temporary, but playable, countertrend bounce. Chart I-11The Pound Usually Turns When Its Fractal Structure Has Collapsed The Pound Usually Turns When Its Fractal Structure Has Collapsed The Pound Usually Turns When Its Fractal Structure Has Collapsed On this assumption, a recommended tactical trade, with a maximum holding period of 65 days, is to go long GBP/CHF, setting a profit target and symmetrical stop-loss at 4 percent. Chart 1Hungarian Bonds Are Oversold Hungarian Bonds Are Oversold Hungarian Bonds Are Oversold Chart 2Copper's Tactical Rebound Maybe Over Copper's Tactical Rebound Maybe Over Copper's Tactical Rebound Maybe Over Chart 3US REITS Are Oversold Versus Utilities US REITS Are Oversold Versus Utilities US REITS Are Oversold Versus Utilities Chart 4FTSE100 Outperformance Vs. Euro Stoxx 50 Is Vulnerable FTSE100 Outperformance Vs. Euro Stoxx 50 Is Vulnerable FTSE100 Outperformance Vs. Euro Stoxx 50 Is Vulnerable Chart 5Netherlands' Underperformance Vs. Switzerland Has Ended Netherlands' Underperformance Vs. Switzerland Has Ended Netherlands' Underperformance Vs. Switzerland Has Ended Chart 6The Sell-Off In The 30-Year T-Bond At Fractal Fragility The Sell-Off In The 30-Year T-Bond At Fractal Fragility The Sell-Off In The 30-Year T-Bond At Fractal Fragility Chart 7Food And Beverage Outperformance Is Exhausted Food And Beverage Outperformance Is Exhausted Food And Beverage Outperformance Is Exhausted Chart 8German Telecom Outperformance Has Started Is Fragile German Telecom Outperformance Has Started Is Fragile German Telecom Outperformance Has Started Is Fragile Chart 9Japanese Telecom Outperformance Vulnerable To Reversal Japanese Telecom Outperformance Vulnerable To Reversal Japanese Telecom Outperformance Vulnerable To Reversal Chart 10The Strong Trend In The 18-Month-Out US Interest Rate Future Is Fragile The Strong Trend In The 18-Month-Out US Interest Rate Future Is Fragile The Strong Trend In The 18-Month-Out US Interest Rate Future Is Fragile Chart 11The Strong Downtrend In The 3 Year T-Bond Is Fragile The Strong Downtrend In The 3 Year T-Bond Is Fragile The Strong Downtrend In The 3 Year T-Bond Is Fragile Chart 12The Outperformance Of Tobacco Vs. Cannabis Is Fragile The Outperformance Of Tobacco Vs. Cannabis Is Fragile The Outperformance Of Tobacco Vs. Cannabis Is Fragile Chart 13Biotech Is A Major Buy Biotech Is A Major Buy Biotech Is A Major Buy Chart 14Norway's Outperformance Has Ended Norway's Outperformance Has Ended Norway's Outperformance Has Ended Chart 15Cotton Versus Platinum Has Reversed Cotton Versus Platinum Has Reversed Cotton Versus Platinum Has Reversed Chart 16Switzerland's Outperformance Vs. Germany Is Exhausted Switzerland's Outperformance Vs. Germany Is Exhausted Switzerland's Outperformance Vs. Germany Is Exhausted Chart 17USD/EUR Is Vulnerable To Reversal USD/EUR Is Vulnerable To Reversal USD/EUR Is Vulnerable To Reversal Chart 18The Outperformance Of MSCI Hong Kong Versus China Has Ended The Outperformance Of MSCI Hong Kong Versus China Has Ended The Outperformance Of MSCI Hong Kong Versus China Has Ended Chart 19US Utilities Outperformance Vulnerable To Reversal US Utilities Outperformance Vulnerable To Reversal US Utilities Outperformance Vulnerable To Reversal Chart 20The Outperformance Of Oil Versus Banks Is Exhausted The Outperformance Of Oil Versus Banks Is Exhausted The Outperformance Of Oil Versus Banks Is Exhausted Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Footnotes 1 The Rate of Return on Everything, 1870–2015 (frbsf.org) Fractal Trading System Fractal Trades Will Surging Mortgage Rates Crash House Prices? Will Surging Mortgage Rates Crash House Prices? Will Surging Mortgage Rates Crash House Prices? Will Surging Mortgage Rates Crash House Prices? 6-12 Month Recommendations 6-12 MONTH RECOMMENDATIONS EXPIRE AFTER 15 MONTHS, IF NOT CLOSED EARLIER. Structural Recommendations Closed Fractal Trades Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields - Euro Area Indicators To Watch - Bond Yields - Euro Area Indicators To Watch - Bond Yields - Euro Area Chart II-2Indicators To Watch - Bond Yields - Europe Ex Euro Area Indicators To Watch - Bond Yields - Europe Ex Euro Area Indicators To Watch - Bond Yields - Europe Ex Euro Area Chart II-3Indicators To Watch - Bond Yields - Asia Indicators To Watch - Bond Yields - Asia Indicators To Watch - Bond Yields - Asia Chart II-4Indicators To Watch - Bond Yields - Other Developed Indicators To Watch - Bond Yields - Other Developed Indicators To Watch - Bond Yields - Other Developed   Indicators To Watch - Interest Rate Expectations Chart II-5Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations  

Please note I will be hosting a live webcast on September 29, 2022 at 9:00 AM HKT for the APAC region. I will discuss the global/China/EM macro outlooks and financial market implications. For clients in the Americas and EMEA, we had a webcast on September 28, 2022. You can access the replay via this link. Arthur Budaghyan Executive Summary Global Semi Stock Prices: Further Downside Ahead Global Semi Stock Prices: Further Downside Ahead Global Semi Stock Prices: Further Downside Ahead Global semiconductor stock prices are still vulnerable to meaningful downside over the next three months. Global semi consumption will contract due to the corresponding waning demand of smartphones, personal computers, and other consumer electronics. Global semi demand in sectors of automobiles and datacenters will continue growing. However, such an increase in demand cannot offset the demand reduction in other sectors. Semiconductor consumption in China has entered a contraction phase.  Semiconductor inventories have swelled. Alongside a sharp upsurge in chip production capacity, this increase in inventories will lead to chip price deflation in the next nine months. Nevertheless, the structural outlook for global semiconductor demand remains constructive. We are waiting for a better entry point for semi stocks.  Bottom Line: There is more downside in global semiconductor share prices as well as Taiwanese and Korean tech stocks. We will seek to recommend buying semiconductor stocks when a more material decline in semi companies’ profits is priced in their share prices. At the moment, we are downgrading Taiwanese stocks from neutral to underweight relative to the EM equity benchmark but are maintaining an overweight stance on the Korean bourse within an EM equity portfolio.   The global semiconductor equity index is breaking below its technical support (Chart 1). The implication is that these share prices are in an air pocket and investors should not chase a declining market. Based on previous cycles, we expect global semiconductor stocks to bottom late this year or early next year and semi sales to trough in 2023Q2. In the previous five cycles, global semi stocks always bottomed before global semi sales and lead times varied from three-to-six months. Chart 2 shows that Taiwan’s semiconductor new export orders lead global semi sales by about three months, and they continue to point to considerable downside in the global semi-industry. Chart 1Global Semi Stocks: Breaking Down Global Semi Stocks: Breaking Down Global Semi Stocks: Breaking Down Chart 2Global Semi Sales: More Downside Ahead Global Semi Sales: More Downside Ahead Global Semi Sales: More Downside Ahead The semiconductor industry has a history of cyclicality. Shortages have been followed by oversupply, which has led to declining prices, revenues, and profits for semi producers. This time is no exception Global Semi Sales: A Cyclical Slump Underway Global semiconductor demand began its downward trajectory in May of this year and will continue to slide in the next three-to-six months. Both the volume and value of China’s semiconductor imports are in a deep contraction and China’s imports from Taiwan have also plummeted (Chart 3). China is the world’s largest consumer of semiconductors, accounting for 35% of global demand. We expect semi sales to remain in contraction in China and to shrink in regions outside China in the next six-to-nine months (Chart 4).  Chart 3China's Semi Imports Plummeted China's Semi Imports Plummeted China's Semi Imports Plummeted Chart 4Semi Sales Will Contract Across Regions Semi Sales Will Contract Across Regions Semi Sales Will Contract Across Regions There are several important reasons for the retrenchment worldwide. First, the lockdowns around the world in 2020 and 2021 generated an unprecedented increase in online activities and a corresponding surge in demand for smartphones/PCs/tablets/game consoles/electronic gadgets. This was the main driving force for the boom in global semiconductor sales from 2020Q3 to 2022Q1. The excessive demand for consumer goods and electronics has run its course and global demand will sag in the next six months. As we have been contending since early this year, global exports are set to contract. Households that bought these goods in the past two years probably will not make new purchases in the near term. In addition, declining real disposable income and rising interest rates will constrain consumer spending. Smartphones, PCs, tablets, home appliances, and other household electronic goods consume about half of global semi output. In addition, rising job uncertainties resulting from China’s dynamic zero-COVID policy and slowing household income growth will curb consumption within China. Here are our takeaways for each segment: Chart 5China's Output Of Mobile Phones And PCs Has Been Shrinking China's Output Of Mobile Phones And PCs Has Been Shrinking China's Output Of Mobile Phones And PCs Has Been Shrinking Mobile phones: Mobile phones are the largest contributor to global semi sales, with a share of 31% as of 2021, based on the data from World Semiconductor Trade Statistics (WSTS). According to the International Data Corporation (IDC), global smartphone shipments are set to decline by 6.5% year-over-year in volume terms in 2022. Smartphone OEMs cut their orders drastically in 2022 because of high inventories and low demand, with no signs of an immediate recovery. China accounts for 67% of global mobile phone production and its mobile phone production has been contracting (Chart 5, top panel).   Traditional PCs and tablets: Based on data from the IDC, global traditional PC1  and tablet shipments are set to decline by 12.8% year-over-year in 2022 and by an additional 2.6% next year in volume terms. Computer production in China, which is the world’s largest computer producer and exporter, also shows massive downsizing (Chart 5, bottom panel).   Home appliances: China is also the largest producer and exporter of air conditioners (ACs), washing machines, refrigerators, and freezers. Except for a slight growth in AC output in response to heatwaves in China and Europe, China’s output of other home appliances will shrink. Globally, these industries accounted for about half of all semiconductor sales in 2021. Given the overconsumption of these goods worldwide over the past two years, we expect a material decline in these sectors in the next six-to-nine months. Second, automobiles, servers, and industrial electronics, which together account for about 30% of global semi sales, will have positive single-digit growth going forward. Yet, such an increase will not be enough to offset the lost demand from the consumer electronic goods sector in the next six-to-nine months.  Chart 6Global Auto Production Will Rise Global Auto Production Will Rise Global Auto Production Will Rise Automotive (accounts for 11% of world chip demand): The chip shortage in this sector has eased only moderately. Auto output levels in major producing countries remain well below their pre-pandemic levels (Chart 6). In light of improved foundry capacity, semiconductor producers will be able to produce automotive chips and reduce lingering shortages. However, for most chips to automakers, there are no supply shortages. Only a small number of categories of automotive chips, such as microcontrollers (MCU) and insulated-gate bipolar transistors (IGBT), are still in tight supply. Given that the total automotive sector only accounted for about 5% of total global semi sales last year, the recovery in global automobile output will contribute only limited growth to global semi sales.   Servers (account for 10% of world chip demand): The surge in online activities resulted in greater demand for cloud services and remote work applications, both of which require computer servers. Total server demand is comprised of data servers for cloud providers and private enterprises, with the former as the main driving force in recent years.  Data center expansion among cloud service providers will be driven by 5G, automotive, cloud gaming, and high-performance computing. After expanding by 10% last year, the pace of annual growth in global server shipments will likely be more moderate, to about 5%-6% in the next couple of quarters.   Chart 7Global Industrial Demand For Chips Is Set to Decelerate Global Industrial Demand For Chips Is Set to Decelerate Global Industrial Demand For Chips Is Set to Decelerate Industrial electronics (account for 9% of world chip demand): The growth rate in semi demand for this sector is falling. The global manufacturing new order-to-inventory ratio has plunged, and global manufacturing production is set to decline for the rest of this year and through to 2023H1 (Chart 7). Nevertheless, given structural tailwinds for industrial electronics, we expect semi demand in this sector to dip to single-digit growth in the near term rather than to contract.  Third, with semiconductor inventories having surged, new orders for chips, and hence their production, will plummet.   The length and intensity of the chip shortage, which started in 2020H2, triggered stockpiling among a broad range of customers, including manufacturers of smartphones and other consumer electronics. Moreover, the recent slowdown in smartphone/PC demand increased the inventory of silicon chips. Chart 8Semiconductor Inventory Overhang Semiconductor Inventory Overhang Semiconductor Inventory Overhang China had also stockpiled semiconductors from 2020Q2 to 2021Q4. With faltering demand, the country will continue its destocking process in the next couple of quarters. Semiconductor inventories in Taiwan and Korea have surged, corroborating the fact that the current cyclical downturn in the global semi sector will be a severe one (Chart 8). Hence, businesses in the semi supply chain will continue to draw upon their inventories rather than increase their semiconductors orders. This will reduce semiconductor demand meaningfully in the coming months. Bottom Line: The cyclical slump in worldwide semiconductor sales has further to go, with the sector’s sale volumes and prices projected to contract in the next six months. Semi producers will experience a substantial decline in their profits. Comparing Cycles Previous cycles may provide insight in the downside of the cyclical slump in global semi sales. In the previous five cycles, global semi sales experienced a contraction, ranging from 7% to 45% (Table 1). In the current cycle, global semi sales still had 7% year-over-year growth in 2022Q2 (Chart 9). Table 1Six Cyclical Downturns In Global Semiconductor Market Have Global Semi Stocks Hit Bottom? Have Global Semi Stocks Hit Bottom? Chart 9Global Semi Stocks And Global Semi Sales Global Semiconductor Market: Sales & Share Prices Global Semi Stocks And Global Semi Sales Global Semiconductor Market: Sales & Share Prices Global Semi Stocks And Global Semi Sales Global Semiconductor Market: Sales & Share Prices In fact, the current downturn could be deeper than the one between 2018 and 2019 (when sales contracted by 16%) for the following reasons: Sales of both cell phones and PCs will likely dwindle further this time than they did in 2018 to 2019. The pandemic boosted demand for consumer electronics, but this also brought forward future demand. In comparison with 2018, the current cycle might have a longer replacement cycle for mobile phones and PCs. Unlike 2019, global demand for consumer goods will likely contract rather than decelerate. This has ramifications for the duration and magnitude of the semi downturn.   Economic growth, and job and income uncertainties in China are much worse now than they were between 2018 and 2019. These factors will likely lead to a bigger cut in IT spending by both consumers and businesses, resulting in a larger downturn in global semi demand in this cycle. The tech battle between the US and China is more intense than in it was from 2018 to 2019. In mid-2018, the U.S. imposed a 25% tariff on Chinese imports of semiconductor goods, including machines and flat panel displays. China retaliated by imposing its own 25% tariff on U.S. exports of semiconductor goods, such as test equipment. This month, the US imposed new restrictions on NVIDIA and AMD in relation to selling artificial intelligence chips to Chinese customers. The US also plans to curb further its shipments of chipmaking tools to China. These plans will cut China’s imports of high-end semi products, for which producers enjoy high profit margins. In addition, the shortage of these chips will stall the development and sales of many consumer products within China, which will thereby reduce demand for other types of chips needed for consumer products. Chart 10Rapid Semi Capacity Expansion Worldwide Rapid Semi Capacity Expansion Worldwide Rapid Semi Capacity Expansion Worldwide Global semi capacity expansion has recently been much stronger in current cycle than it was in the 2016-2018 cycle. This may lead to a bigger supply surplus in this cycle than in the last one. It takes about 18-24 months, on average, to build a new semiconductor fabrication plant. Thus, large capital expenditures by semi producers in 2021-22 entail considerable new supply in 2023-24. According to IC Insights, the annual wafer capacity growth rates were 6.5% in 2020, 8.5% in 2021 and 8.7% in 2022. This compares with 4%-6.5% between 2016 and 2018 (Chart 10). Rapid capacity expansion typically leads to price deflation for chips and is therefore negative for the semi producers’ profitability and their share prices. Are global semi stock prices already pricing bad news? We do not think so. Nearly all major players saw a drop in revenues in the past cycle. In sharp contrast, only Intel’s revenues have dropped so far in the current cycle (Chart 11). Global semi stock prices will continue falling as companies report shrinking sales and earnings in the next couple of quarters. In former cycles when global semi stocks bottomed, investor sentiment – as measured by the net EPS revisions – was more downbeat than it is currently (Chart 12). Chart 11More Semi Companies' Sales Are Likely To Contract More Semi Companies' Sales Are Likely To Contract More Semi Companies' Sales Are Likely To Contract Chart 12Global Semi Stock Prices: Net EPS To Drop More Global Semi Stock Prices: Net EPS To Drop More Global Semi Stock Prices: Net EPS To Drop More Bottom Line: The global semiconductor sector’s cyclical slump could be deeper than it was in the 2018-2019 cycle. Hence, shares prices will fall considerably more than they did in late 2018. Ramifications For Taiwanese And Korean Markets Taiwanese and Korean semiconductor stock prices will probably continue to fall in absolute terms. The former recently broke its three-year moving average and the latter its six-year moving average (Chart 13). Chart 13Taiwanese And Korean Semi Stock Prices Will Fall Further Taiwanese And Korean Semi Stock Prices Will Fall Further Taiwanese And Korean Semi Stock Prices Will Fall Further Chart 14TSMC: Smartphone And HPC Make 81% Of Revenue Have Global Semi Stocks Hit Bottom? Have Global Semi Stocks Hit Bottom? For TSMC, the smartphone sector still accounts for 38% of revenues (Chart 14). Hence, a contraction in global smartphone sales in the next six-to-nine months could hurt the company’s top and bottom lines considerably. Meanwhile, the high-performance computing (HPC) sector became the largest contributor of TSMC revenues with a 43% share. A slowdown in data center investment and a decrease in GPU demand due to falling bitcoin prices will also materially affect the company’s profitability. In addition, the US government’s AI chips export restriction policy will decrease NVIDIA and AMD AI sales to China. According to NVIDIA’s news release, approximately US$400 million in potential chip sales to China (including Hong Kong) will likely be subject to this new restriction. AI chips are manufactured by TSMC with its advanced node technology and have a high-profit margin. Hence, the new policy will negatively impact TSMC’s revenues and profits. For Samsung, the memory market is in a free-fall due to plummeting demand (Chart 15). TrendForce expects the average overall DRAM price to drop by 13-18% in 2022Q4 because of high inventories in the supply chain and stagnant demand. The semi shipment-to-inventories ratios for both Taiwan and South Korea nosedived, pointing to lower semi stock prices in these two markets (Chart 16). Chart 15Samsung: Vulnerable To Sinking Prices Of Memory Chips Samsung: Vulnerable To Sinking Prices Of Memory Chips Samsung: Vulnerable To Sinking Prices Of Memory Chips Chart 16Semi Shipments-to-Inventory Ratios Plunged In Taiwan And Korea Semi Shipments-to-Inventory Ratios Plunged In Taiwan And Korea Semi Shipments-to-Inventory Ratios Plunged In Taiwan And Korea Bottom Line: Both TSMC and Samsung stock prices have more downside over the next three months.  Equity Valuations And Investment Conclusions The global semiconductor stock index in USD terms has tumbled by 45% from its recent peak. Multiples of semiconductor stocks are near their long-term average levels (Chart 17 and 18). These multiples could undershoot as they did in 2018-2019, which means even more downside is ahead. Chart 17Multiples Of Semi Stocks Could Undershoot Multiples Of Semi Stocks Could Undershoot Multiples Of Semi Stocks Could Undershoot Chart 18Multiples Of Semi Stocks Could Undershoot Multiples Of Semi Stocks Could Undershoot Multiples Of Semi Stocks Could Undershoot Aside from the profit outlook, higher US bond yields are also causing multiple compression for global semiconductor stocks (Chart 19). As to the allocation to semi stocks within an EM equity portfolio, we recommend downgrading Taiwan from a neutral allocation to underweight and reiterate an overweight stance on the KOSPI. The US-China geopolitical confrontation will escalate in the coming years and Taiwan is at the epicenter of this. These are relative calls, that is against the EM benchmark (Chart 20). We remain negative on their absolute performance. Chart 19Higher US Bond Yields = Multiple Compression In Global Semi Stocks Higher US Bond Yields = Multiple Compression In Global Semi Stocks Higher US Bond Yields = Multiple Compression In Global Semi Stocks Chart 20Downgrade Taiwan To Underweight Relative To The EM Benchmark Downgrade Taiwan To Underweight Relative To The EM Benchmark Downgrade Taiwan To Underweight Relative To The EM Benchmark   Finally, the structural outlook for global semiconductor demand remains constructive. We are waiting for a better entry point. We would recommend buying semiconductor stocks after pricing in a more material contraction in semi companies’ revenues and profits. Ellen JingYuan He Associate Vice President ellenj@bcaresearch.com Footnotes 1     Traditional PCs are comprised of desktops, notebooks and workstations.

Listen to a short summary of this report     Executive Summary Sales & Profit Margins: The Two Propellers That Powered The Post-GFC US Rally What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? US equity markets underperformed the global benchmark by 10% over 2000-08. Since then, the US has outperformed the global benchmark by about 170%. So, what has driven the US’ chartbusting performance in the post-GFC period? If we break down the US’ price performance into three parts – namely price-to-earnings ratio, net profit margins, and sales – then it becomes clear that growth in the latter two elements played a key role in driving US outperformance in the post-GFC era. Can the US’ outperformance relative to global markets persist going forward? It appears unlikely that the US’ high profit margins can sustain these levels of growth going forward. Distinct from the mean reversion argument, the US’ high profit margins are unusually concentrated amongst a fistful of firms.  US firms may also find it challenging to maintain high sales growth as US GDP growth slows and given that America’s antitrust philosophy may soon undergo a once-in-a-generation change. Finally, it is worth noting that ‘sector composition’ effects played a significant role in driving US outperformance over 2008-22. Given that we expect outperforming sectors like Tech to become underperformers, this effect could become weaker going forward, thereby subverting another source of the US’ outperformance.   Bottom Line: Forecasting is a tenuous science but given that the two prime propellers of the US’ performance engine are likely to confront headwinds going forward, investors should consider reducing allocations to US equities over a longer term, strategic horizon.   Dear Client,  I am meeting clients in Asia this week while also working on our Fourth Quarter Strategy Outlook, which will be published next week, followed by my webcast the week after. In lieu of our regular report this week, you are receiving a Special Report from my colleague, Ritika Mankar, discussing the sources of US equity outperformance over the past 14 years and the likely path ahead. Best Regards,  Peter Berezin, Chief Global Strategist US Stock Market Dominance – It Wasn’t Always This Way Let us assume that you could travel back in time, and today was December 31, 2008. On this day you know that US and Japanese equity markets have underperformed the global benchmark (Chart 1). You also know that Europe (i.e., EU-27) has done marginally better than the US, while Emerging Markets (EM) have been the star outperformer. Let us further assume that by close of play today you have to deploy US$10bn across these four equity markets (across the US, Europe, Japan, and EM).  As if the task of taking this decision on the last day of this historic year was not enough, let us assume that the funds you invest must be locked in until the fall of 2022. Finally, let us add one more condition to this task – let us suppose that you have no idea how markets would perform over the 2008-22 period, but you have perfect foresight about how the nominal GDP of these four regions would look like in 2022. Specifically, you know that EM GDP will have a terrific run between 2008 to 2022, US GDP will increase but by a far less impressive degree, European GDP will grow only slightly, and Japan’s GDP would be lesser in 2022 than it was in 2008 (Chart 2).  Chart 1US Equities Underperformed The Global Benchmark By 10% Over 2000-08 US Equities Underperformed The Global Benchmark By 10% Over 2000-08 US Equities Underperformed The Global Benchmark By 10% Over 2000-08 Chart 2EM GDP Has More Than Doubled Since The GFC What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 3US Equities Outperformed The Global Benchmark By About 170% Over 2008-22YTD US Equities Outperformed The Global Benchmark By About 170% Over 2008-22YTD US Equities Outperformed The Global Benchmark By About 170% Over 2008-22YTD If you were to take an investment decision based only this information, what is certain is that the fund you manage would underperform by a painful degree. This is because we now know that even though US markets had poor momentum in 2008, and the US’ GDP expansion paled relative to EM, US equity markets outperformed global markets by a wide margin since 2008 (Chart 3). On the other hand, despite positive momentum and high GDP growth, EM emerged as a distant second-best performer. Japan miraculously made it to third place despite a contraction in nominal GDP, and finally Europe ended up being the worst performer. If market momentum and GDP growth cannot explain these market movements, then what drove the US' outstanding performance in the post-GFC period? In this Special Report, we delve into answering this question in detail. The purpose of peeling the onion of the US' performance is simple – we hope to extract the insights that investors need to construct alpha-generating portfolios, in a world where forward time travel is not a possibility (yet). The US’ Performance Has Been Powered More By Earnings, Less By Valuations The two basic building blocks of any equity index are its earnings and its price-to-earnings ratio. The former captures the fundamentals backing an index, while the latter quantifies the valuation element. Breaking down the US’ performance into these two parts shows that earnings have been the prime factor that have propelled the rise of US equity markets in the post-GFC era (Chart 4). That earnings have been an important driver of the US’ outperformance becomes even more apparent when US earnings are compared to that of other major markets. For instance, the steep expansion in US earnings contrasts with the situation across the Atlantic. In Europe, earnings have trended lower relative to the global benchmark since 2008 and an increase in relative valuations has helped lend a floor to the index (Chart 5). The earnings report card for Japan and EM, on the other hand, have been surprisingly similar as earnings failed to rise meaningfully in both these geographies in the post-GFC period (Chart 6 and 7). Chart 4Earnings Have Played A Key Role In Propelling The Post-GFC US Rally What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 5European Equities Supported More By Valuation Multiples What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 6Earnings Growth Has Been Unimpressive In Japan Too What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 7Earnings Have Trended Lower In EM Since 2008 What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? In summary, the US' price-to-earnings ratio has had a meaningful role in driving US outperformance in the post-GFC period (Chart 8), but earnings expansion has played an outsized role (Chart 9). Chart 8Relative Valuation Multiples Have Played A Key Role In Supporting European Markets What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 9Earnings Expansion In The US Has Been Phenomenal What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? In fact, the growth in earnings in the US in the post-GFC era has been so noteworthy that if US equity market prices were to be broken down into its two building blocks i.e., earnings and price-to-earnings ratio, then the lion’s share of US equity market prices today would be attributed to its earnings (Chart 10). Expectedly, this contrasts with the situation in Europe where equity market prices have managed to stay afloat owing to a re-rating in its price-to-earnings ratio (Chart 11). These attribution analysis numbers are not meant to be taken literally, but rather, reflect the relative role played by earnings and price-to-earnings ratios in supporting the prices of regional indices. Chart 10US Equities: Supported More By Earnings What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 11EU Equities: More Reliant On Multiples What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? The Unsung Hero Behind The US’ Outperformance - Record Sales Expansion The index of a region can also be envisaged as the product of three elements, namely: (1) its price-to-earnings ratio; (2) its net profit margins; and (3) its sales. In other words: Price = (Price / Earnings) x (Earnings / Sales) x (Sales) While the US' healthy earnings tend to attract disproportionate investor attention, this formulation shows how a surge in US sales was the bigger driver of US outperformance (Chart 12). US profit margins experienced a sharp surge relative to global profit margins over the 2008-12 period, but then this parameter flatlined. US sales, on the other hand, have managed to register a steady march upwards over the entirety of the post-GFC period. The growth in sales of listed American corporations has in fact been so remarkable that a grand total of ten American firms now have annual sales of over $200 billion – which marks an all-time high for the US (Chart 13). Chart 12Post-GFC US Rally Powered By Record Sales Expansion What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 13The US Is Home To Ten Firms With Revenues Of +$200bn What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Furthermore, the US’ lead on sales today is meaningful not only by its own historical standards, but by cross-country standards too. The rise in US sales has meant that the US is now home to half of the twenty largest listed corporations globally (Table 1). Conversely, Europe and Japan, despite being the third and fourth largest economies of the world, respectively, together account for only three names on this list. Notably however, Emerging Markets have managed to punch above their weight and are home to six of the top twenty firms by sales globally. Table 1The US Today Dominates The Global List Of Top 20 Firms By Revenue What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? The steep rise in America’s sales in the post-GFC world is also unique because no other major market has experienced such a clear upward move in sales as the US has. Europe and Japan in fact saw their sales-per-share trend downwards in the post-GFC period (Chart 14 and Chart 15). Emerging markets  were the only other major global market where sales-per-share managed to stay steady relative to the global benchmark (Chart 16). Chart 14Europe’s Sales Have Trended Lower Post-GFC What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 15Japan’s Sales Also Trended Lower Post-GFC What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Finally, thanks to the high growth in US sales, the contribution of sales to US equity prices is far higher than the contribution of its net profit margins or its price-to-earnings ratio (Chart 17). This once again is in sharp contrast to a market like Europe, where only a smidgeon of the European equity prices pie can be attributed to its sales. Chart 16EM Sales Have Expanded Marginally Post-2008 What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 17The Main Engine That Powers US Markets Is ‘Sales’ What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 18US Profit Margins Have Also Been Expanding Steadily Post-GFC What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Distinct from the role played by growing sales, the US’ stellar post-GFC performance has also been powered by growing profit margins. It is notable that the US has experienced an unusually strong upward movement in its profit margins in the post-GFC period (Chart 18). Japan is the only other region which has seen its profit margins expand post-GFC, with both Europe and EM having experienced a fall in profit margins from the levels seen in 2008. A Quick Note On Dividends: The US Lags On Dividend Yields But Leads On Buybacks Thus far we have focused on the returns generated by the US market relative to the world and the factors that drove US outperformance since the GFC. If one were to focus on the dividend yield component, then it is notable that the US lags its peers on this front. Post-GFC, the first major cresting of dividend yields globally took place in 2009-10. Then the next major move down in yields took place in 2020 (Chart 19). While globally, yields have now recovered from this last dip, the US finds itself lagging on this metric which matters for pension funds that rely on annuities (Chart 20). Not only have dividend yields in the US almost halved since the GFC, but the gap between dividend yields offered by the US and other markets has widened over the last few years. Europe however has managed to stay the undisputed leader when it comes to dividend yields through most of the 21st century. Chart 19Global Dividend Yields Have Recovered From The Post-2020 Fall What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 20US Lags Global Markets On Dividend Yields What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 21Pace Of Buybacks In The US Has Been Meaningful Pace Of Buybacks In The US Has Been Meaningful Pace Of Buybacks In The US Has Been Meaningful Notably, however, while the US lags its peers on dividend yields, it leads when it comes to buybacks. The latter is evident from the fact that proxy measures of shares outstanding have trended lower in the US in the post-GFC period, as compared to the rest of the world (Chart 21). Finally, it is important to note that both the growth in dividends-per-share as well as the absolute level of dividends in the US has been high. This parameter has increased by 2.4 times since 2008 and US dividends in absolute terms are nearly 5 times that of Europe’s dividends today. The only reason why dividend yields have stayed low despite this is because US equity prices have had a stellar run in the post-GFC period.     Can This Extent Of US Outperformance Persist? Having delved into the drivers of the US’ performance, we now know that a record expansion in sales and net profit margins have driven its outstanding performance in the post-GFC era. This in turn means that the probability of the US continuing to outperform over the next few years will be closely linked to its ability to maintain a lead on these two parameters. So how is the US positioned with respect to both these factors?   The US’ High Profit Margins Appear Unsustainable, For A Wide Range Of Reasons We have established the fact that expanding profit margins have been a supporting driver of the US’ outperformance in the post-GFC period. Now, the consensus view is that US profit margins are extraordinarily high and that they will eventually come down to earth. The logic for this argument is often grounded in mean reversion. We have also previously highlighted that most of the increase in US profit margins has occurred due to rising margins within the tech sector and the accompanying increase in the market cap weight of tech within benchmark indices. Chart 22US High Profit Margins Are Concentrated Amongst Top Firms What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Aside from these reasons, two more factors could lead to the compression of US profit margins over the next few years. Firstly, it is worth noting that the US' high profit margins are unusually concentrated amongst a handful of firms. While the US as a market is characterized by high margins at the headline level, profit margins of companies below the top tier are notably lower than that of the top tier (Chart 22). If profit margins were uniformly high across the US listed space and the divergence was low, then the probability of sustaining elevated margins would have been higher. But given that the US uniquely suffers from a high profit margin concentration problem, the probability of the sustainability of US high profit margins appears lower. Secondly, history suggests that in the globalized world that we live in, any region’s profit margins fail to persist above the global average beyond a maximum of 15 years (Table 2). This makes sense and is in line with economic theory which suggests that when profitability in a particular market is excessive, then new firms will enter this space, increase competition, and thereby exert downward pressure on the incumbents’ profit margins. Table 2Regional Profit Margins Seldom Persist Above The Global Average Beyond 15 Years What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Given that US profit margins have now persisted above global levels for almost 13 years, if history were to repeat itself, then it appears highly likely that US profit margins would trend towards the global average over the next 2 years.   US Sales Growth: A Peak Appears Nigh We now know that the rapid sales expansion experienced by US firms has been the prime driver of the US stock market outperformance since the GFC. However, the prognosis for this variable also appears shaky for the US. Chart 23US GDP And Sales Tend To Move In Lockstep What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? The key macro variable which has the tightest theoretical link to the sales generated by the companies in a country is the country’s nominal GDP. Even as companies headquartered in the US end up selling to the global economy, history suggests that the link between the US’ nominal GDP and the sales generated by listed American firms are closely linked (Chart 23). Given that the pace of US nominal GDP growth is set to slow over the next few years (relative to both its past and relative to other major economies), US companies’ sales growth could end up slowing too (Chart 24). Also, given that the US revenue-to-nominal GDP ratio is already elevated, it is likely that even as the US’ nominal GDP keeps growing, the pace of conversion of this GDP into revenues will stay the same or may even diminish over the coming decade.   Chart 24US GDP Growth Is Set To Slow What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Then from a bottom-up perspective, we are also of the view that the US economy’s ability to spawn mega-sized companies (by sales) may become increasingly compromised over the next decade. This is because a peculiar stagnation is in the works in the middle tier of American firms, which tend to become the mega-sized corporations of tomorrow. Finally, the US' antitrust philosophy is likely to undergo a once-in-a-generation change under the Biden administration. This could mean that America’s mega-scaled firms (which have had a free run up until now) could end-up baiting regulatory attention, restricting their ability to grow sales.   US Price Performance: Strong Sector Effects Are Unlikely To Persist Chart 25Sector Composition Effect: Strongest For The US What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Lastly, it is worth noting that the price performance of the broad US equity index subverts the role played by “sector composition” in driving the US' outperformance. The fact that returns generated by the US benchmark are higher than the returns generated by a hypothetical US index which weights all sectors equally suggests that “sector composition” effects had a meaningful role in driving US outperformance. In fact, as compared to other major markets, the sector composition effect is the most prominent for the US (Chart 25). Another way of quantifying the role of sector effects is to compare the US’ market cap expansion relative to a global benchmark after removing the market cap of top-performing sectors. Expectedly, US outperformance relative to the global benchmark over the post-GFC period gets substantially reduced if the market cap of the three top-performing sectors (namely Information Technology, Consumer Discretionary, and Health Care) is adjusted for (Chart 26). To complicate matters, the sector composition effect in the US has been unwinding but remains high (Chart 27). Given that we expect outperforming sectors like Tech to turn into underperformers, the sector constitution effect in the US could weaken going forward, thereby subverting another source of US outperformance.  Chart 26Extent Of US Outperformance Weakens Sans Tech, Consumer Discretionary, And Health Care What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Chart 27Sector Composition Effect In The US Remains High What Has Driven US Outperformance Post-GFC And Can This Persist? What Has Driven US Outperformance Post-GFC And Can This Persist? Investment Conclusions The prime drivers of US outperformance relative to the global benchmark in the post-GFC period have been ascendant sales and rising net profit margins. Forecasting is a tenuous science but given that both these propellers of the US equity market engine are set to face headwinds, investors should consider reducing allocations to US equities over a longer term, strategic horizon. Ritika Mankar, CFA Editor/Strategist Ritika.Mankar@bcaresearch.com