The past year has seen a strong performance in the US stock markets, with the S&P 500 and Nasdaq up around 28% and 40%, respectively, outpacing many international markets.
As the markets hit record highs, some investors may wonder if they should look beyond the US for potential returns.
Saxo, an investment brokerage, noted that the top five traded stocks in 2023 were from the US. “Out of these five, all were tech stocks and four are part of the notorious ‘Magnificent 7’,” says Saxo Asia Pacific CEO Adam Reynolds.
The “Magnificent 7” of tech stocks, inspired by the 1960 film Magnificent Seven, represent seven companies known for their market dominance, technological impact and influence on consumer behaviour. These stocks are Microsoft, Nvidia, Alphabet, Amazon, Meta, Apple and Tesla.
Reynolds suggests a few reasons why investors often have too much exposure to the US. Firstly, the US stock market is the biggest and most liquid. US companies also get a lot of media coverage, making information about them easily available. Lastly, nearly all brokers provide access to US stock exchanges.
“You would be surprised, but some brokers only offer access to a handful of stock exchanges. This means that your choice of broker might restrict your ability to trade in the markets you want,” he adds.
See also: Huawei helps accelerate ICT talent cultivation for mutual benefits in intelligent education
Investors should know that keeping portfolios limited to the Magnificent 7 is risky. Reynolds points out that this set of stocks is significantly undiversified, with all of them being domiciled in the US and being tech-heavy equities — this is three full strikes of being undiversified in geography, sector and asset class. That poses a significant risk.
He adds: “Even within the Magnificent 7, we are starting to see a bit of a divergence in this earning season. Meta and Microsoft are doing slightly better and Apple and Tesla are starting to lag. The million-dollar question is, how long can these companies continue to meet the sky-high expectations placed on them by the markets?”
Diversification is crucial for investors because it lessens the impact of any one part of their portfolio performing poorly. By investing in different countries or regions, investors spread their risk exposure, which helps cushion against events that could end a rally. It also shields their portfolio from negative currency movements, among other benefits.
See also: Incubating technology projects to foster an inclusive and sustainable Smart Nation 2.0
Markets to consider
The European equity market might seem less attractive lately. It is often linked with old-school industries and slow growth. But Reynolds points out that Europe’s market is diverse and focuses more on value than the tech-heavy US market.
He adds that European companies generate significant revenues outside the bloc and can boast of industry leaders in some key sectors, such as semiconductors or defence, that can be extremely important in the rapidly fragmenting global economy.
Contrary to common belief, there is also a huge list of innovators in Europe who could be potential candidates for a high return on invested capital, which is key for long-term equity returns.
Furthermore, European equities trade at a significant discount to their US counterparts, with the Euro Stoxx 600 currently trading at a P/E of 14 times as against the S&P 500’s at 24 times, says Reynolds.
One standout company Saxo found is Danish drugmaker Novo Nordisk, which has delivered over 50% average returns annually for the past five years.
Novo Nordisk develops GLP-1 medications for diabetes treatment and obesity management, including Wegovy, Ozempic and Rybelsus.
For more stories about where money flows, click here for Capital Section
Bloomberg photo: Saxo highlighted Danish drugmaker Novo Nordisk as a top performer, boasting over 50% average annual returns for five years. Novo Nordisk specialises in medications for diabetes and obesity like Wegovy, Ozempic (pictured) and Rybelsus.
Elsewhere, China may not be on investors’ radar after hopes for the highly anticipated rebound after lifting pandemic restrictions dissipated.
Reynolds acknowledges that China’s economy is facing structural issues unlikely to be resolved by band-aid measures such as rate cuts, macroeconomic stimulus, or market interventions. With debt concerns at hand, it is unlikely that Chinese authorities will announce a big-bang stimulus package.
Valuation is historically cheap and investors are waiting for reasons to enter the market. Reynolds believes investors may wish to follow the flow of government capital in China while officials are focused on developing some key industries to enhance productivity, technology and self-reliance. These could include technology, advanced manufacturing, green energy and food security.
For instance, last year, China extended its tax exemption policy for new energy vehicles until 2027, which provides stability and support for consumers and manufacturers, aside from encouraging foreign investment prospects in the country’s electric mobility.
Supply chain shifts
Markets benefit from the slowdown in China and the rejigging of supply chains, including India, Mexico and Vietnam.
Although the Indian market has become expensive, growth is expected to outpace China and more companies are likely to follow suit after Apple has started manufacturing iPhones in India, says Reynolds.
Unlike China, Japan’s stock market has become the darling of Asia, with Nikkei up over 40% over the past year.
The Nikkei 225 Stock Average reached a record high on Feb 22, up 2.2% to close above its peak in 1989, following a rally in tech shares.
Reynolds suggests that it might not be too late for investors to enter the market despite these factors. He points out that ongoing structural and geopolitical changes in corporate culture and supply chains could keep Japan on a positive trajectory for years.
“A global recession could disrupt, however, from a tactical perspective — but any pullbacks can mean more funds and investors pile into Japanese equities to participate in the long-term upside potential.”
To help investors explore more markets and further diversify their portfolios, Saxo is introducing a new competitive pricing structure that is made to be simpler and lowers overall trading costs for investors.
Since being founded in 1992 and entering Singapore in 2006, Saxo’s purpose has always been to make the global financial markets more accessible, says Reynolds.
This has been done in two ways — ensuring the platform has the widest breadth of products available and focusing on delivering an industry-leading user interface and user experience. “Introducing our new pricing marks the third, reducing the barrier and complication of fees while lowering overall trading costs for investors. There is a perception that Saxo is far more expensive than other brokers in the market, but this is untrue. Comparing apples to apples, Saxo’s new prices are extremely competitive.”
Reducing currency conversion costs is the most significant way Saxo’s new pricing will allow investors to diversify their portfolios globally.
While there is awareness and strong competition around commission rates, there is often less awareness around other transaction-based costs like currency conversion costs.
Fee reduction benefits
All these lesser-known fees add up in the long run and significantly erode an investor’s returns. Having achieved its scale, Saxo can trim these fees with its new pricing, giving investors back more of their returns.
Second, Saxo has lowered the minimum commission rates across global markets. For example, the minimum commission for US stocks is dropping from US$2 ($2.69) to US$1 and from GBP8 ($13.62) to GBP3 for UK stocks. This means investors placing smaller trades will be paying significantly lower commissions.
Finally, Saxo provides access to these global markets, emphasising Reynolds. While it is relatively easy for retail investors to access the US, UK and Singapore markets from here, finding a broker offering certain European markets like Denmark and France or Asian markets like Malaysia and Japan can still be challenging.
“The bottom line is that investors should not have to be at the mercy of their broker when deciding what markets they want to invest in,” he adds.
For Saxo’s full offering, click here.
