When good is good enough

31st January 2024

There are not many certainties in life but one thing you can be certain about are that market predictions will be made at the beginning of every year and there’s little certainty they’ll be right. 

MPF members are predicting that US equities will continue to rise in 2024. 

Recent MPF fund flow data shows US equity funds were amongst the most popular MPF members’ fund choices in 2023 suggesting that US equities will continue to do well.  Indeed, over the past 10 years US equities produced phenomenal returns until the end of 2021 and again in 2023, far surpassing the results achieved in other markets and significantly better than results achieved in MPF’s largest asset class, Hong Kong and China equities which are now at multi-year lows. While results speak for themselves, what really drove the outperformance of US equities?  Scratch the surface you’ll find the driver of US equites “phenomenal” performance were growth companies, dig a little deeper and it reveals the “Magnificent 7”. Strip out the likes of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla and you find a different performance outcome. Still good but perhaps not “phenomenal”.

The technology companies investors are buying today are giants with valuations in the trillions and profits in the billions. These companies are ‘priced for perfection’ as the hype surrounding them continues to skyrocket – The excitement around artificial intelligence (AI) as seen a company like Nvidia which MPF US equity funds like Sun Life’s MPF US Equity Fund, and Manulife, AIA and HSBC’s respective North American Equity Funds are likely to invest in, trade at a price to earnings ratio up to 144x in April 2023, and while it is significantly cheaper today at around 40x earnings, there are potentially better value stocks to invest in. While having performed very well, the risk with high valuations is any hint of negative news usually has a disproportionate impact on valuations and one risks significant losses, particularly if you invested at the peak.

So are MPF members right in their shifting of retirement money to North America? 

Compared with other regions, consumers are still in relatively in good shape with high savings levels and manageable mortgages, the job market is strong with low unemployment levels, corporates continue to produce surprisingly positive results, and the Federal Reserve appears to be on track for a soft landing as it balances inflation and interest rates. This of course can still all change but overall the US appears better positioned than other regions.

Is this the year where US equities fall behind? 

Well, who really knows? And that’s the point, while the US appears better placed than other markets, US equities has had a very strong run driven by concentrated number of stocks. Diversification is key and the MPFA’s mandated low fee DIS funds could be an interesting way for MPF members to get US equity exposure but also manage risk. It has higher weights to US equities than traditional balanced and mixed asset funds but it also has exposure to other asset classes ensuring DIS investors are diversified.  DIS may not deliver “phenomenal” performance, but when it comes to saving and investing for retirement, “good” is often good enough. 

This article was written by MPF Ratings, Hong Kong’s independent provider of MPF research, views and education.

The information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

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