America’s leadership of the global stock market is ending

trading floor traders emptyFrank

The era of the US market’s leadership among global stocks is

Since the bottom in March 2009, the SP 500 has climbed by
254%, and investors who have been consistently putting their
money into US companies enjoyed some nice returns on the way

“Economic data complemented by relative shifts in central bank
policy suggests 2017 will be a year in which US risk assets
relinquish their recent leadership to markets in the rest of the
world,” said Brian Nick, the chief investment
strategist at TIAA Investments, an affiliate of the
investment-management firm Nuveen. 

The relatively high valuation of US stocks signals that returns
may be lower than expected in the next few years, Nick

Several emerging markets are much cheaper. Relative to the US’
8-year-long recovery, some countries like Brazil are just pulling
out of recession. Additionally, the strength of the US
dollar makes the rest of the world attractive on a currency

All this means that it’s time for US investors with a heavy home
bias to start to diversify. 

“People can get away with owning only US companies, but cannot
get away with that in a place like Belgium,” Nick told Business

US stocks are the most overvalued since the 2000 tech bubble,
judging by the cyclically adjusted price-to-earnings ratio. It’s

not unusual
for the SP 500 to trade above its average
CAPE ratio. But with stocks this expensive, investors should
expect milder returns on a five to 10-year horizon, Nick

Additionally, high expectations for tax and fiscal policy
have already hit roadblocks in the first 100 days of
President Donald Trump’s term. The so-called Trump rally lifted
the Dow
Jones industrial average
to record high after record high.
But it stalled in March as the American Health Care Act

Some analysts had expected a pullback ahead of the first-quarter
earnings reporting season, which could show that profit growth is
catching up to the rally in stock prices. But even if
earnings pick up, Nick anticipates that the market’s gains over
the next several quarters would be small, especially if outflows
from the US pick up.

Political risk is mispriced

Nick’s preferred destination is the Eurozone, where a number of
key elections this year could create some volatility. 

A good country in Europe to look at is France, the “epicenter of
risk,” Nick said. An election on April 23 — with a possible
run-off election on May 7 — could make the far-right party leader

Marine Le Pen

“Political risk has been mispriced because I don’t think the
adverse election outcome is as likely as the market is making it
seem,” Nick said. 

On the other hand, he added, US investors are
underestimating the risk of policy delays and flops like the
failure of the AHCA. 

It appears that US investors are already moving some capital
elsewhere following the failure to repeal and replace

According to Bank of America Merrill Lynch, the AHCA vote sped up
flows to non-US equities. Screen Shot 2017 04 04 at 10.26.45 AMBank of America Merrill Lynch

Outside Europe, Nick said India is another preferred market. Its
equity market is one of the
best performers
in the world this year amid optimism that
Prime Minister Narendra Modi will implement his reform agenda.

Mexico is another market to consider, he said. Its economic ties
to the US could be strengthened under the new administration
following some positive comments from officials
including Peter
, Trump’s trade adviser. 

Nick pointed out interest-rate US sectors like real estate,
consumer staples, and utilities, which could be vulnerable to
policy disappointments, as sectors where one might want to reduce
exposure. However, sectors linked to economic growth like
consumer discretionary and tech should continue to do

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