Q4 Outlook: US equity outperformance to end?
Video length: 1 minute

Q4 Outlook: US equity outperformance to end?

Peter Garnry
Head of Equity Strategy

Summary:  Investors with pure equity exposure are at risk to a potential global recession.

The end of US equity outperformance

In April 2008, the USD weakness in real terms that started in February 2002 ended months before a historical credit crunch and tailspin that required astronomical policy effort to mitigate. Since then, the USD has strengthened by 22% in real terms. And in August 2019, it reached a high enough level for the US Treasury Secretary Steve Mnuchin to declare that the US government does not intend to intervene in the USD for now — although he also said that the Trump administration had weighed up intervention. In other words, the US is planning to intervene if the Fed does not manage to weaken the USD through monetary policy. 

This quarterly outlook examines how this situation will impact equity markets.

Emerging markets will thrive on weaker USD

The Fed uses the trade-weighted broad USD index to measure how strong the USD is relative to its trade partners’ currencies.
Over the period from July 1995 to August 2019, equity returns in the US, the world ex-US and emerging markets have had a negative correlation to the USD. In other words, whenever the USD weakens equity markets should strengthen. As the world’s reserve currency, largest trading currency and the currency used in commodity markets, the USD is an important component in financial conditions. Since the 2008 crash, emerging market countries have seen a large increase in issuance of USD bonds which has added another growth constraint from the USD.


If we break the period into regimes of stronger or weaker real USD, then a clear pattern appears. Whenever the USD strengthens, the US equity market outperforms the world ex-US and emerging markets and vice versa. As explained in our Quarterly Outlook, some form of USD intervention is the next logical policy step. Monetary policy has lost its effectiveness and fiscal stimulus is coming to slowly to offset the weakness in the global economy (the OECD’s leading indicators have been declining for 18 straight months). A great irony of any USD intervention is that it will partly help China, which is not exactly the strategy of the Trump administration but as with everything in life there are always trade-offs.


When the strong USD regime ends, investors should overweight European and especially emerging market equities. There is also good support for this strategic position from a valuation perspective as the valuation spread — measured on the dividend yield — has soared to historically attractive levels for the world ex-US and emerging markets. 


US equities have had a historical run

As we have been writing over many quarters, US equities are expensive in both relative and absolute terms. They remain expensive due to multiple factors ranging from higher share of buybacks, safe-haven status, higher profit growth driven by technology monopolies and finally a healed financial sector. Valuation metrics are difficult to use as timing tools because the market can often remain insane for long periods and maybe we are going through such a period. But rich valuation premiums to other equity markets are typically not a good starting point for relative superior returns in the future.


In February 2019, equity markets celebrated the 10-year anniversary of the equity market bottom during the financial crisis. The celebration occurred with a historic equity outperformance over aggregate US government bonds of 339% or 16% annualised. This is one of the best 10-year periods for US equities relative to government bonds since 1973, only marginally topped by the dot-com peak. It is quite likely that the next 10 years will not offer attractive equity returns in terms of outperformance and especially not when factoring in the downside risk relative to upside risk.

Stronghold EUR is not in panic mode yet

Our team’s tactical asset allocation strategy, Stronghold, went online during the summer on our trading platforms through Saxo Bank’s managed portfolio service SaxoSelect. The model behind Stronghold is based on a pure mathematical framework aimed at reducing drawdowns while trying to maximise returns. The model has a strict risk budget and therefore cuts risk quickly if the market structure become highly correlated across asset classes.

The EUR version of the model is up 10.6% as of mid-September and increased exposure in equities slowly over the first half of the year. But in the last three months, its equity exposure has been reduced to around 40% with the main exposure in minimum volatility stocks. The portfolio is balanced as of September also reflecting our general stance to clients. Remain invested in equities but in high quality and minimum volatility stocks. Investors attempting to escape low yields with pure equity exposure are running portfolios that are at risk to policy mistakes and a potential global recession — which has a probability of around 25-40% within the next 6-12 months.

Source: Saxo Bank


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.