Tech Selloff calls for bets against US stock market supremacy

The sale came after a gangbuster year for the US market. The win for US stocks was the largest by one measure since 1997. Including dividends, the MSCI USA index returned 27%. That’s 19 percentage points more than the total return of an MSCI index that tracks stocks in 49 developed and emerging markets, excluding the US, measured in dollars.

Hammered by a regulatory constraint on tech companies and concerns over the real estate sector, Chinese stocks lagged behind the pack. As measured by MSCI, the market returned minus 22% in dollars.

Europe outperformed but was held back for US-based investors by a weakening euro. Total returns on European equities were close to par with US equities in terms of local currency. When converted to dollars, it was 10 percentage points short.

BNP Paribas Asset Management is positioning itself to take advantage of a rebound in equities outside the US technology sector. The Paris-based fund manager has allocated more money to US small-cap stocks and equities in Europe and Japan.

“If we expect US interest rates to rise, that would, on a relative basis, get in the way of technology,” said Daniel Morris, the company’s chief market strategist.

The direction of government bond yields will help determine whether the US market moves forward again this year, investors and analysts say. US equities withdrew from European equities at the beginning of last summer after, among other things, the delta wave of the corona virus caused government bond yields to fall.

Rising interest rates depress the share prices of profitable companies well into the future, making bonds relatively more attractive to own than more speculative investments. The Fed has positioned itself to raise interest rates faster than most other rich world central banks, which some investors and analysts believe could raise US interest rates and undermine technical valuations.

Andrew Sheets, chief cross-asset strategist at Morgan Stanley, sees Europe and Japan performing better this year. “When investors look at those markets, they don’t see them as markets that should be punished if interest rates were higher,” he said.

The real interest rate on 10-year Treasury bills, which takes into account the inflation effect on investor returns, ended 2021 virtually unchanged. In 2018, the last time they rose, MSCI’s levels of US equities fell, but less than equities in Europe, Japan and China.

The US market has outpaced the rest of the world for four years in a row and some investors say it will expand that streak to a fifth despite the hurdles. The main reason: the tech companies like Apple Inc.

and momentum stocks like Tesla Inc.

that spread in the US are less spotted abroad.

When Apple crossed the $3 trillion market cap this week, it was roughly the same valuation as all the companies on London’s FTSE 100 combined.

“I think they can continue to outperform,” Shep Perkins, chief investment officer for equities at Putnam Investments, said of US equities. “Income from the fundamentals was very good. If revenues slowed materially, it would be a different story.”

While energy stocks were the top performers on the S&P 500 in 2021, the sector has shrunk to a slice of the broad market, with major tech companies leading the year’s gains. “Huge mega-caps outperformed the S&P 500, which helped improve the performance of the S&P 500,” said Perkins.

US investors who stuck to domestic equities were rewarded. Vanguard Group’s FTSE Europe ETF, which trades in New York and has Nestlé SA and ASML Holding NV among its largest holdings, rose 13% in 2021, according to FactSet. The SPDR S&P 500 ETF rose 27%.

Ronald Temple, co-head of multiasset at Lazard Asset Management, said the timing of betting money in the US or switching to foreign stocks is tricky. Mr. Temple prefers to hunt for what he calls high-quality companies, or companies with high and rising returns on capital. He finds more in the US, partly due to the country’s larger tech sector.

“Because there are so many more quality companies in the US, you tend to pay less for them,” said Mr. Temple.

Write to Joe Wallace at [email protected]