In recent weeks, the number of commentators suggesting that US exceptionalism is dead, the US economy is in trouble, and the so-called ‘Big Beautiful Bill’ may put a hole below the waterline of US finances has been multiplying. You might think that alarm bells would be ringing in US equity markets. However, the S&P 500 has continued its steady recovery from the tariff-related turmoil of early April and is now up year-to-date.

The move means that the leading US index is trading on a price/earnings (PE) ratio of about 25.3x, which compares to just 13.3x for the FTSE 100. US-listed stocks account for almost two thirds of the MSCI All Countries World Index (MSCI ACWI). If you strip them out, the World ex-US Index is on a PE ratio of 16.5x versus 21.5x if they are included.

Clearly, if confidence in the US market cracks, ETFs that track global indices are going to be hit hard. Those global trusts that have an asset allocation that does not depart too far from that of the MSCI ACWI would also suffer.

We often question why it is that US stocks are so highly prized relative to those in other markets. The recent news that Wise (WISE) – which in a small way is still a feature in Chrysalis’s (CHRY ) portfolio – is considering moving its primary listing to New York from London illustrates the point. It argues that by making itself more accessible to US investors, it will attract more interest in its shares, which will drive up its rating. 

Over decades, in the UK and many other markets, the shift from prioritising domestic investments to global mandates has encouraged a steady flow of capital into the US, deepening the pool of liquidity there – which encourages companies to list there, boosting its share of global indices further, which sucks in more capital in a virtuous circle.

Now, for reasons best known to him, Trump seems set on ending this. His ‘Big Beautiful Bill’ – which includes extensions to many tax cuts from the president’s first term and will lead to a jump in US debt levels – threatens US finances, undermining the American bond market’s safe haven status as well as the dollar. That has attracted opprobrium from the likes of Jamie Dimon and Elon Musk. It also contains a clause – section 899 – which could reverse investor flows into the country. 

TwentyFour Asset Management’s Felipe Villarroel – part of the management team that looks after TwentyFour Select Monthly Income (SMIF ) – has written about the problem. The clause would allow the US government to impose additional taxes on corporate earnings, interest, dividends, and property disposal gains for foreign companies operating in the US. This could be weaponised – like tariffs – to punish countries that Trump feels have an unfair tax system. As an example, Felipe suggests that entities of a British bank such as Barclays (BARC) that carry out business in the US could see their corporate tax rate effectively double in the next four years. 

It is not fanciful to imagine that section 899 could trigger a flood of capital out of US markets. It seems reasonable that the valuation gap between US equities and everywhere else might narrow, perhaps suddenly or maybe gradually over many years.

Underweight the US

That got me wondering which global and flexible trusts might hold up relatively well in such a scenario. 

The first thing to note is that relative to the MSCI ACWI, all of these trusts have an underweight exposure to the US (I am quoting end April data). I think managers are acknowledging that US equities look relatively expensive. However, in most cases the stance is not that extreme.

Included among the outliers is Scottish Mortgage (SMT ), with 53.5% in North America (a 13 percentage point underweight). Brunner (BUT ), which still retains a benchmark that favours a high UK weighting, has 41.4% in North America. AVI Global (AGT ), which has always been structurally underweight the US and used to have a world ex-US benchmark, has just 7.8%. Lastly, Lindsell Train (LTI ), where the geographic exposures reflect the importance of its stake in the UK-domiciled management company, has 16.8% in the US, including a stake in its North American Equity fund. 

In the flexible investment sector, the tendency is to be underweight equities in any case. RIT Capital Partners (RCP ) is the most exposed to the country, but it has more in private investments and uncorrelated strategies than equities and so should be somewhat cushioned from any sharp fall in equity markets. It is a similar story for Caledonia (CLDN ). It is also worth pointing out that, given the long-term capital preservation objectives that these trusts have, their equity exposure is biased away from the riskier parts of the US market anyway.

The most defensively positioned flexible investment trusts – the likes of Capital Gearing (CGT ), Global Opportunities (GOT ), and Personal Assets (PNL ) – are probably best-placed to ride out any storm. They are also well aware of the looming threats to the US and global economies. 

PNL’s Sebastian Lyon, writing at the end of April, highlighted the increasing likelihood of US recession and the poor performance (on average a 31% fall in the S&P 500) that accompanies recessions. CGT’s Chris Clothier, in his results presentation on 5 June, observed that the US dollar does not provide the same safe haven attributes as it has in the past and that US valuations are very stretched – CGT has been favouring UK assets.

GOT is almost 38% in cash, yet still trades on a 20% plus discount, which makes no sense to me. GOT’s Sandy Nairn sets out a case that the era of passive investing is peaking. He feels that a multi-decade period where a rising tide lifted all boats is faltering and now investors must be flexible and nimble if they want to prosper. It is an interesting stance and one that I will explore in another article.

James Carthew is head of investment company research at QuotedData

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