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Here are the arguments laid out by Global ETF bulls which i m about to demolish. I live in a developing country so i have an idea of whats going on. Before you say AI, no it is not AI written, i have to organise it or else it will be a freaking wall of text.
**1. Argument 1: Global ETF outperformance cycle is starting, US outperformance cycle is ending.** This argument does not understand the growth drivers of each market. It assumes there is a winner cycle like this; US> Global > US > Global, but there isnt really one.
**Global ETF**: Global ETF is driven by catching up growth in emerging markets, while US market is driven by productivity (tech) growth. There was a period of time when emerging markets grew really rapidly, especially China (the heavyweight), which then tapered off after 2010. Commodity markets were also booming as there were demand from general economic growth, which stopped booming when emerging markets growth slowed. In other words, this argument assumes something like that will happen again. However, most of these emerging markets (e.g. China, Thailand, Malaysia) have already caught up to middle income and are struggling to escape the middle income trap. India is the main growth engine here, if you are seriously looking at Global ETF for that growth, just buy India lol. Catching up growth is also not sustainable and I consider it low quality growth.
**US ETF:** The US market is predominantly driven by productivity or tech related growth, which is a very high quality growth and the kind of growth you want in an AI world. If you are looking for this kind of growth outside the US, China is probably the closest but I do not think they are leaders, they are very good copycats though.
**2. Argument 2: US has high PE and is overvalued.** You need to consider two factors when talking about PE.
**ROIC:** The US market PE is inflated by powerful and very dominant tech companies who have low ROIC, and thus command a high PE. When excluding tech stocks, US market is priced at 20x PE while Global market is priced at 17x PE. That's very fair considering corporate governance which i will discuss after this. Outside the US, you will be hardpressed to find large, dominant, and innovative tech companies with the quality of the US, and this gap between US and the world is widening, not narrowing. The only country that is close to the US in this aspect is China. But Chinese tech companies are again, nothing like the US tech companies.
**Corporate Governance:** This is a massive issue in developing countries. I live in an emerging market, and i can tell you corporate governance here is absymal. Even developed countries like Korea and Japan have terrible CG. That means just because they become developed it doesnt mean these people will change their culture or implement the institutions and systems that CG requires. These guys are not shareholder centric. In China, the companies answer to the government and the cronies. In other emerging markets and East Asia, the companies answer to the family owner and cronies. With terrible CG comes terrible capital allocation and A LOT of fraud. Active investors in Asian markets will understand my meaning. Even Singapore doesnt even have companies with good CG and capital allocation outside their bank stocks.
**3. Argument 3: US is losing the leadership role of the world order.** No, the US is not losing its leadership. It is China that is rising rapidly. This argument somehow assumes that US companies cannot perform well in a multipolar world. This argument works if every single region, not simply China, can stand up to the US. However, this is not the case. The only possible contender to the US is China. Thus, the world only has two options: China or the US. Forget about any global coordinated efforts. The US and China alone is almost half of the world economy. EU is the other quarter. Out of these 3 countries, only the US has the military heft, the technological lead, the dominance over international standards and systems, the global trust, and the ideological + cultural dominance. If you want to understand how to difficult or almost impossible to unseat the US, flip the script and ask why should China even become the defacto world leader. China has to do many things at once: 1. Have military that can project overwhelming force thousands of miles away; 2. Have culture and ideology that is universally accepted; 3. Can be trusted to own and maintain the financial intermediation systems; 4. Can unseat American technological dominance without copycatting; 5. Has innovation and risk taking culture inculcated in the US.
**4. Argument 4: Diversification vs putting all eggs in a basket.** The argument of diversification does not work here. Because you are exchanging gold for crap. You are selling off high quality US in favour of:
a. Europe who has innovation problems, productivity stagnation, fragmentation, population stagnation.
b. China who is an authoratarian regime who does believe in shareholder first approach, who has horrible corporate governance, facing severe population crisis and housing crisis, has a distorted economic system leading to inefficient capital allocation (i.e. overproduction of EVs and solar, race to the bottom competition in the tech industry)
c. Korea and Japan with ultra conservative and family centric companies, population decline, and faltering technological competitiveness.
d. Southeast Asia who has serious corporate governance issues, terrible corruption, stuck in low value economy (vietnam included). Also, i dont buy that Vietnam is going to become as technologically competitive as even China. Their growth is driven in a large part by Chinese companies shoring out low value production to that country to avoid tariffs. Chinese companies want to keep high value manufacturing in China, and is increasingly seeking to dominate low value manufacturing through robotics and ignore low labour cost destinations all together, time will tell if they succeed.
e. India with serious corruption issue, a service led economy that completely bypassed the industrial revolution because China is dominating everything industrial. India is also at the low value part of the tech value chain and is suffering severe brain drain to the US. Also extremely inefficient government (unlike China) and very unfavourable culture that holds back women and discourages a progressive mindset. India is even less educated than China decades ago.
f. Rest of the world like Africa and South America. I dont think this needs further explanation.