Will U.S. equities continue to outperform?

After a strong year for the S&P 500, one question on many investors’ minds is whether U.S. stocks will continue to lead the pack. Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland, said there’s no easy answer.

Listen to the full podcast on Advisor To Go, powered by CIBC Asset Management.

Despite the historical strength of the U.S. market, MacLean urges caution when predicting future success. He believes in taking a closer look at the quality of individual companies regardless of where they’re located rather than relying solely on broader market trends. 

“The U.S. is home to a great many excellent world-class businesses,” he said, “but there are also many excellent world-class businesses that exist outside of the United States.”

Considering the significance of the “Magnificent Seven” within the MSCI World Index, such as Microsoft and Alphabet, MacLean said their impact has been driven by their ability to generate substantial cash flow and navigate various market conditions successfully. 

“Over the long term, these businesses should continue to do well,” he said. 

However, MacLean cautioned against assuming uniform performance across all companies, emphasizing the need for careful evaluation on a case-by-case basis.

Each business “is operating in its own sort of environment,” he said, highlighting variations in valuation and growth trajectories. Consequently, he said investors should avoid generalizations when evaluating these companies.

Looking ahead, MacLean advocates for a long-term investment approach, particularly in sectors poised for growth, such as technology and health care. 

For technology, constant innovation offers opportunities for new businesses to emerge, he said. As for health care, MacLean said factors like labour shortages and budget constraints have led to attractive valuations for some companies, potentially paving the way for a stronger performance in the near future.

While short-term fluctuations are inevitable, MacLean stressed the importance of maintaining a forward-looking perspective and focusing on companies with strong fundamentals.

“We have less exposure to those sectors that are more cyclical and perhaps not capable of the sort of levels of returns that we would look for,” he said. 

Beyond the U.S. market, MacLean has mixed reviews for regions such as Japan and China. 

Regarding Japan, MacLean acknowledged the country’s reputation for housing strong businesses but also said there are significant challenges, including high debt-to-GDP ratios and an aging population. While some progress has been made in terms of corporate governance reform, there remains much ground to cover, he said, especially within the financial sector burdened by debt from years of low interest rates.

As for China, MacLean noted the recent struggles but maintains a slightly more optimistic outlook, citing ongoing recovery efforts and attractive valuations in certain sectors. Despite uncertainties, he said pockets of opportunity may exist for investors willing to navigate the risks and volatility inherent in the Chinese market.

“It may take slightly longer than the market would like, but it’s definitely underway,” he said. 

This article is part of the Advisor To Go program, powered by CIBC. It was written without input from the sponsor.