Reasons why U.S. equities will underperform – UBS analyst (NYSEARCA:ITOT)

UBS analysts list several reasons why U.S. equities (NYSEARCA:ITOT), (SP500), (SPY), (VOO), (DJI) should underperform in a recent Global Equities Strategy report.

Since 2010, Strategist Andrew Garthwaite wrote, U.S. underperformance was very brief and mild at about 5-9% and five to nine months, but between 2000 and 2010, the periods were much sharper: nearly 12 to 75 months against Europe, and between 12-19%.

In addition, historically, when global PMIs rise more than 2 points over six months, the U.S. underperforms since it has the lowest operational leverage of any major region. “We are almost at this level now, and still rising, and statistically it should rise with global PMIs in the bottom 25% of their range,” said Garthwaite.

Also, there is a closing growth differential between the U.S. GDP and non-U.S. GDP, especially European GDP. Analysts believe this gap is closing “quite sharply” as U.S. excess savings have now been largely used and immigration is peaking.

U.S. fiscal policy has been eased by 13 percentage points of GDP than that of Europe, and Japan. “If all of the U.S. deficit was financed at the long end, then fiscal tightening of 4.5% of GDP would be needed to stabilize government debt to GDP,” Garthwaite wrote. “This is more than any other region.” This could cause a U.S. bond spread risk or a relative growth risk.

Also, about 69% of the U.S. margin improvement came from lower rates and tax, compared to 4% in Japan, and almost zero in Europe.

Finally, the U.S. scores the least in UBS’ composite scorecard, which looks at valuation, economic, earnings momentum, positioning, and sensitivity to macro factors, the report said. As an example, the P/E relative is almost 2 standard deviations above its norm on a 25% premium. Also, U.S. equities have used buybacks to reduce share count and boost their EPS much more than any other region.