The United States has the world’s single largest economy, accounting for almost a quarter of global GDP (Global Domestic Product)1, one fifth of a global FDI (Foreign Direct Investment)2, and more than a third of stock market capitalisation3. Having just returned from my adventures in California, I caught myself thinking why America is the richest, most productive, and most innovative economy in the world?
Martin Feldstein in his paper ‘Why is Growth Better in the United States than in other Industrial Countries?’ concludes that entrepreneurial culture is the main reason why the US remains in the top position across all charts. Indeed, entrepreneurship is the engine of economic growth and Americans are also pouring more fuel into this. In 2021, American venture capital (VC) firms invested $164 billion in more than 10,000 businesses1. In the first half of 2021, US VC investing was five times the amount in all of Europe4. On top of the advanced system of equity finance, Americans are literally working harder: on average a full-time employee in the US works 1,800 per year, which is 258 hours extra than their peers in Europe5. Adding world class universities, a growing population, and favourable energy market creates the perfect environment for capitalism to flourish.
America also has a huge impact on the global economy. Numerous studies have evidenced the US influence on the business and financial cycles in other economies (Dees & Saint-Guilhem, 2009; Kose et al 2017; Boehm & Kroner, 20236) In other words, when the US sneezes the rest of the world catches a cold. If you follow the S&P 500 index (benchmark for large cap US equities), it has outperformed the FTSE 100 by 225% over the past decade7.
It comes as no surprise that the largest country exposure in our flagship portfolios is the United States, which reinforces the points above. Saying that, quite recently we marginally reduced our US allocation in less attractively valued tech companies that have performed well in 2023. Even though tactically we favour more defensive low volatility equities, particularly in Europe and the US, over the long term we believe that the US market have compelling characteristics in terms on innovation drivers, sector compositions and higher profitability dynamics that are key in building a successful long-term portfolio.
Interested to hear more about our investment approach? Contact us today to get started.
I caught myself thinking why America is the richest, most productive, and most innovative economy in the world?
1 Visualizing the U.S. Share of the Global Economy Over Time (visualcapitalist.com)
2 Global foreign direct investment flows over the last 30 years | UNCTAD
3 Visualizing the Global Share of U.S. Stock Markets (visualcapitalist.com)
4 Why Expand Your Business to the USA | Foothold’ America
5 Average Working Hours (Statistical Data 2021) (clockify.me)
6 The US, Economic News, and the Global Financial Cycle | NBER
7 S&P500 (total return) vs FTSE 100 (total return) in GBP 10 years as per 03/07/2023. Data source: Refinitiv
Information correct as of 7th July 2023
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