While the exchange-traded fund (ETF) provider admits it doesn’t have a crystal ball, its senior portfolio manager has the next best thing – three key signals the firm monitors to determine whether a major unwinding could be imminent.
“All three of those signals are currently ringing for US assets,” Cameron McCormack told InvestorDaily.
These three signals, outlined by VanEck in its July ViewPoint report, include over-concentration by either the investor or the market, insufficient compensation for risk, and a growing set of unpredictable geopolitical and economic threats.
“Considering the first signal, at the broadest level, the world is overweight US assets,” the ETF provider said in its report.
“Ongoing budget and trade deficits have pushed the US dollar and US debt into the hands of investors all around the world. Furthermore, the prolonged bull market has led the world to be overweight in US equities.”
On the second signal, the ETF provider pointed to a near disappearance of the US equity risk premium, as well as inflation and risk premiums in US bonds and credit markets.
Moreover, it noted that the US dollar also trades significantly above its purchasing power parity against most major currencies, raising questions about valuation sustainability.
As VanEck put it: “Valuation isn’t direction, but it is destiny.”
Finally, it noted, the number of risk factors continue to gather.
Elaborating on the latter, McCormack told InvestorDaily rising trade tensions as Trump’s tariff moratorium nears expiry could spark renewed volatility, prompting a shift away from US equities towards relatively better-valued assets.
“The tariff moratorium Trump imposed a little under three months ago is fast approaching the end, and we may see a flare-up in market turbulence next week, pending progress on global trade deals,” he said.
“A potential breakdown in negotiations for the US and its trading partners could quickly wipe away any newly found markets gains, which could serve to renew – if not accelerate – the rotation from US equities to markets offering more compelling relative value,” McCormack added.
“Potential beneficiaries of this shift include Australian equities and gold and gold miners as defensive hedges”.
Additionally, McCormack highlighted emerging markets bonds and equities as likely to profit given many of these nations are net US dollar creditors and commodity exporters.
“[This] means they’re seeing many of the risks feared by developed markets as opportunities that will further bolster their economies,” he said.
Deficits loom large
VanEck observed that while the direction of US fiscal policy is now more predictable – with the One Big Beautiful Bill (OBBB) expected to pass largely intact – uncertainty remains over how much and for how long markets will tolerate its long-term fiscal consequences.
“Of concern, the US looks set to continue to be running deficits as far as the eye can see, implying increasingly onerous funding requirements,” VanEck said.
It warned that the OBBB will push the debt beyond its current 124 per cent of the gross domestic product (GDP) – potentially to 160 to 200 per cent – primarily by renewing and making permanent expiring tax cuts, and the deficit north of 5 per cent of GDP.
“Those sorts of numbers are dramatically large even for a small-medium economy. For one of the world’s largest, it represents an implausible call on global savings,” the ETF provider said.
However, despite these concerns, VanEck said: “You don’t have to be negative on US assets to lighten up on them.”
“You just have to realise you are not getting paid sufficiently to hold them. So, prudence suggests a better spread of exposures,” it added.
A similar sentiment towards diversification was shared by Fidelity’s Henk-Jan Rikkerink and Salman Ahmed in the asset manager’s midyear outlook, in which the pair told investors that portfolio diversification is “imperative”.
Fidelity’s duo, however, noted that there was still a place for US equities in long-term portfolios and cautioned investors against a total retreat.
“The S&P 500 comprises many of the world’s biggest and most innovative companies, which are highly profitable and shareholder-friendly. It would be unwise to bet against the US entirely; but equally, it is not the only game in town,” they said.
