Interview With Louis-Vincent Gave: US Likely to Underperform for Years

The following is a summary of our recent Guest Expert interview on our podcast, airing Saturday here and on iTunes here.

US stocks are quite pricey relative to other markets while growth prospects have picked up in places like Europe and elsewhere. This time on Financial Sense Newshour, Louis-Vincent Gave from Gavekal Research discusses a possible turn in US equities, bullish and bearish scenarios for the market as a whole, and where he sees the greatest opportunity for investors currently.

Countries Now Growing Faster than the US

Gave believes we might be in for a turn in US markets, either in the form of stagnation or even a possible downturn. Part of the fuel for this is the fact that for years, the US was the only growth story in town, and he believes we’re about to see foreign equities outperform.

“If you look at the past 12 months, Europe has actually grown faster than the US,” he said. “We’re seeing growth in Japan. The really big surprise of the past 12 months is that China, instead of slowing down, has reaccelerated.”

This rebound in China has pulled emerging market growth higher.

Also, the US dollar is no longer that strong, and many emerging market currencies are now going up versus the US dollar.

Bullish and Bearish Scenarios

“Perhaps the story of the next few years is the US starts consolidating and digesting its current overvaluation, while other markets catch up,” he said.

That represents the bullish scenario, in his opinion. The bearish scenario would involve a shock to the system, which could either come from some unexpected geopolitical event or as the Fed continues its tightening cycle, some over-levered player collapses.

There is a lot of debt in the system, and it’s difficult or impossible to know who might fail before it happens. In that event, the US would fall quickly, followed by everybody else, Gave stated.

“Relative value is undeniably in equities outside the US,” he said. “Now that they’re starting to outperform, now that the momentum is behind them, there’s really no reason to be underweight global equities.”

Identifying Opportunities

The best bet is to buy undervalued stocks in undervalued currencies because investors stand to gain both as the stock and underlying currency advance.

“The momentum has now moved our way because these stocks are starting to outperform, and the currencies are starting to outperform,” Gave said. “I tend to believe there are three ways to make money in the markets: you look for return-to-the-mean trades, for momentum trades, and carry trades.”

We can find all three in Europe, he noted. The trend of US underperformance seems to have just started, and he expects it to continue for the next few years.

“That doesn’t mean the US crashes,” he said. “It’s just that the opportunity set abroad is a lot more compelling.”

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