After a very difficult decade, U.S. equities reached a low point in March 2009, the result of rising deficits, wars, government intrusiveness and poor financial regulation of real estate and mortgage-related assets. Investors simply lost confidence in American institutions.
Because confidence plays an essential role in any long-term valuation framework, the appetite for, and valuation of, U.S. equities declined.
But despite the difficult environment, many U.S. companies continued to work hard to make their businesses more efficient and effective. They also redoubled their efforts to capture opportunities around the world, particularly in emerging markets. They put in place new technology to help them manage the business more effectively on a global basis and to speed product development.
Many companies were very successful in these endeavours and, as a result, they were able to grow their businesses at an attractive rate and even add to their already formidable financial strength and capabilities. Many multinational companies now have the predominant share of their business outside of the U.S. and have therefore reduced their dependence on any one region.
Today, they have more control over their destiny than at any other time in history.
The overall lack of confidence, which still persists today despite recently improving equity returns, has caused investors to become excessively risk averse and short-term oriented. As a result, many have allocated most of their capital to very low-risk assets such as Treasury bonds and any forays into equities are best characterized as short-term trades.
Just as excessive enthusiasm for any asset class is usually not rewarded, neither is excessive caution. There is potential today to exploit the fear and short-term thinking influencing investor behaviour by looking to the future with confidence.
Confidence in the ability of well-positioned U.S. companies to provide attractive returns seems to be justified given that these are among the strongest institutions in society today. They are stronger, better managed and more resolute than most government bodies around the world. They will also be among the largest beneficiaries of rising consumer confidence that will occur as governments begin to scale back commitments, reduce deficit spending and adopt a more pro-business attitude, which is inevitable, particularly in the developed world.
There are many opportunities in the world today:
- Technology companies continue to impress with exciting new products that provide enjoyment and enhanced efficiency
- Surprising energy developments in the U.S. are likely to lead to energy self- sufficiency, which in turn seems to be driving an incipient reindustrialization
- Infrastructure needs to be rebuilt in much of the developed world and put in place for the first time in emerging nations
- Reliable financial products and trusted institutions are much needed after the debacle of 2008 and 2009 and large market share opportunities exist
- The rising middle class around the world can now afford many of the products that have become essential to our way of life and this is the biggest opportunity in history for global consumer products companies
This confluence of corporate strength, investor skepticism and an opportunity rich environment is the type of scenario that could prove very rewarding for confident investors.