“But then through the 1990s, Japanese stocks lost 50 per cent of their value, while world equities rose by more than 200 per cent,” he adds.
“The lesson to take is not that the US is going to crash in the way that Japan did,” Mr Kumar says. “The lesson is that concentrating all of your assets in one place can be very damaging. And at the moment, lots of global equity investors are doing just that.”
But how clients are invested in US equities at the moment will depend on their existing exposure, goals, risk appetite and the tenure of their investment outlook, according to Emma Wall, head of investment analysis at Hargreaves Lansdown.
“Because while the US market has appreciated considerably over the past decade, reaching yet new all-time highs this year despite macro headwinds, everyone needs some US stocks in their portfolio,” she adds. “Buying in now may not secure you a bargain, but that doesn’t mean you should sell out entirely either.”
Rebalancing portfolios
So what is an appropriate amount for clients to hold in US equities as part of a diversified portfolio?
Ms Wall says: “Dependent on whether you are looking for growth or income, and your risk appetite, US equities should make up between 20 per cent and 50 per cent of your equity allocation.
“Initiating that position now may be better done through active funds or stock selection, which can take a view on valuations, and then buying broad market exposure through more efficient passive funds on any market dips.”
Mr Drewienkiewicz says it makes sense for long-term investors, who are entirely focused on their own returns, to have a more diverse portfolio than the market-capitalisation weights.
This could mean increasing allocations to markets which have done less well recently, such as emerging markets, Japan, Europe, the UK, or even Chinese A-Shares, though he concedes that such moves aren’t “guaranteed to be a winning play”.
But even if investors do end up seeing a different kind of return profile from US equities in future, most agree it is important to maintain exposure to this asset class.
As Mr Mould says: “If the world stays mired in a low-interest-rate, low-inflation, low-growth funk, the US could well continue to outperform, especially as it is packed with tech and healthcare stocks.
“If we do get a cyclical recovery post-Covid of any note, other, more cyclical areas could offer better earnings growth potential and from a lower starting point in terms of valuation – Asia and to a lesser degree Japan, as well as the UK spring to mind.”
Ellie Duncan is a freelance journalist
