This article is authored by MOI Global instructor Brian Chingono, partner and director of quantitative research at Verdad Advisers, based in New York.

Brian is an instructor at European Investing Summit 2024.

After a stellar 15-year run of robust earnings growth, US stocks have appreciated so much that they now represent 70% of developed market allocations, according to popular indices like the MSCI All Country World Index (ACWI).

As American earnings growth has outpaced international peers over the past 15 years, US stocks have returned 13.4% annualized, more than doubling the 5.9% annualized return of developed international stocks.

But with more than a quarter of total US market capitalization being attributable to just six technology stocks today, it’s worth questioning whether hyper-concentration in yesterday’s winners will be a winning strategy in the years ahead.

To start, it’s worth noting that the US stock market’s magnificent run over the past 15 years has resulted in a cyclically adjusted PE ratio (CAPE) of 36x today, a valuation level that is firmly within expensive territory by historical standards. In the figure below, we grouped historical values of the United States’ CAPE ratio into three categories with an equal number of monthly observations. Each category is highlighted as a backdrop to the time series of US market valuations since 1926.

While the US market trades at an expensive valuation of 36x CAPE today, international markets are more moderately priced, with the European market trading at 21x CAPE and the Japanese market valued at 25x CAPE as of June 30, 2024. As a forward-looking measure, the CAPE ratio has a negative relationship with expected returns, as shown in the figure below, with higher CAPE valuations being associated with lower returns over the next decade.

In addition to lowering expected returns, the expensive valuations in the US may also increase idiosyncratic risk in a portfolio through hyper-concentration in the biggest winners of the past decade. Consider a seemingly diversified index like the ACWI benchmark, which contains more than 2,750 large- and mid-cap stocks from around the world. This global index mechanically allocates two-thirds of capital to the United States, and within its developed market allocation, the United States has a weighting of almost 70%.

To understand why a 70% US allocation may not be the optimal choice for a typical investor in developed markets, it’s important to trace how the ACWI Index arrived at this allocation in the first place. At a fundamental level, equity ownership entitles investors to a portion of companies’ future net income. If we start at this elementary level and sort all developed-market stocks by the net income they generated over the past 12 months, we find that 55% of net income was generated by US firms and 45% was generated by firms in developed international markets. So if an investor were to allocate capital according to where income is being generated today, they would have 55% of their developed equity capital in the US and 45% allocated to international markets.

But financial markets are forward looking. So, in addition to considering trailing earnings, market participants also account for growth expectations when setting prices. Because growth expectations are higher in the US relative to international regions, aggregate market capitalization is significantly larger in the United States. Therefore, based on relative growth expectations, the US allocation within a developed market portfolio increases by 10 percentage points to 65% when companies are sorted by market capitalization.

An implicit assumption behind this market-weighted approach is that analysts are accurate in forecasting earnings growth. But empirical evidence suggests that, on average, analyst forecasts are no better than nominal GDP estimates when forecasting earnings growth over long-term horizons.

Beyond the doubtful accuracy of long-term growth forecasts, commercial indices further orient investors toward questionable allocations by focusing on float-adjusted market capitalization. This means more weight is given to stocks that have a higher proportion of shares available to trade freely on the stock exchange, as opposed to the strategic ownership stakes held by founders and other company insiders. The reason commercial indices prioritize free float is because they are designed for deploying capital at massive scale, especially for the likes of Vanguard and BlackRock. And it also happens to be the case that US firms tend to have a higher proportion of free float relative to their international peers in Europe and Japan. Therefore, the free-float adjustment further exacerbates the bias toward high-expectation US stocks, raising the US allocation by 5 percentage points to a 70% weight when developed market stocks are sorted by float-adjusted market cap.

Fortunately, there are other benchmarks available to investors who are skeptical of lofty growth expectations and aren’t massive enough to be comparable to State Street. For example, investors could start by setting their regional weights according to net income generation (i.e., 55% weight in the US and 45% in developed international markets). Notably, this starting point offers more balanced allocations while still acknowledging the principal role of the United States as an economic engine.

By setting regional weights according to net income, rather than float-adjusted market cap, investors would also benefit from capturing more attractive valuations in international regions. As shown in the chart below, international markets trade at a substantial discount to the US, across multiple measures of value. And within the cheapest segment of each market, valuations are especially attractive internationally, with P/E ratios averaging around 10–13x and Price/Book ratios averaging around 1.1–1.4x across all levels of capitalization.

We believe more balanced allocations across regions would enable investors to increase expected returns within their equity portfolios. Based on current levels of the CAPE ratio, the Nobel laureate economist Robert Shiller estimates that nominal expected returns over the next decade are around 5.2% in the US market, compared to 6.7% in the European market and 6.8% in the Japanese market.

While the US market has dominated over the past decade, an encore may not necessarily follow over the next decade. Growth narratives that previously seemed inevitable can quickly change when faced with reality. For example, consider how the “magnificent seven” has recently shrunk to the “magnificent six,” with Tesla down 14% year-to-date as expectations for electric vehicle growth have moderated. Only 12 months ago, auto industry forecasts by S&P Global were projecting 38% annual growth in EV production in 2024. But in July of 2024, that same forecast was slashed by more than half to 14% growth. Perhaps more concerning for those who bet on EV growth, there are indications that hybrids may play a larger role in the energy transition than previously anticipated, with many car manufacturers announcing new hybrid models and some moving toward flexible architectures that would continue their production of internal combustion vehicles indefinitely, alongside hybrids and EVs. Cars that are at least partially powered by fossil fuels may not become obsolete at all.

If this downward revision in growth expectations could occur among EVs, which are subsidized (and in some cases mandated), we believe a similar reality check could occur with current expectations for artificial intelligence. Relative to the US, international markets are less exposed to the AI expectation frenzy. So when considering a benchmark for their global developed equity portfolio, investors may be well served by balanced allocations that are based on net income generation, with around 55% weight in the US and 45% internationally.

Disclaimers: This does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. This information generated by the charts, tables, and graphs presented herein is for general informational and general comparative purposes only. This document may contain forward-looking statements that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable, however, such statements necessarily involve risks, uncertainties and assumptions, and investors may not put undue reliance on any of these statements. References to indices or benchmarks herein are for informational and general comparative purposes only. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The information in this presentation is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice or investment recommendations. Each recipient should consult its own tax, legal, accounting, financial, or other advisors about the issues discussed herein.

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This article is authored by MOI Global instructor Stuart Mitchell, investment manager at S. W. Mitchell Capital, based in London.

Stuart is an instructor at European Investing Summit 2024.

Over the last ten years markets have been characterised by unusually low interest rates and all sorts of resulting distortions in capital markets. In the equity world, the dash to speculative technology and growth-at-any-price has led to an extraordinary boom and bust of fund managers like Cathie Wood and Baillie Gifford.

But even now, seventeen months into a tightening cycle, investors continue to be lured into new bubbles dreaming that they have found another Nvidia.

One such bubble may well be Novo Nordisk. The share price has risen by almost three times over the past two years driven by expectations for their anti-obesity drug Wegovy.

So what is Wegovy? Wegovy is the weight loss brand name for Semaglutide that was originally developed by Novo to treat type 2 diabetes in 2012.

Wegovy is a glucogen-like peptide-1 receptor agonist (GLP-1) that mimics the incretin glucagen-like peptide-1 to increase the production of insulin and lower blood sugar levels. The effect is to lower appetite and slow down the process of digestion in the stomach. The STEP1 trial published in 2022, ‘revealed an average 14.9% reduction in bodyweight from baseline during 68 weeks of treatment with semaglutide 2.4 mg plus a lifestyle intervention, compared with just a 2.4% reduction in the placebo plus lifestyle intervention group.’

With so many obese people in the world the opportunity for the drug appears to be very significant.

The consensus for analysts is that GLP-1 sales will reach $100 billion by 2031 and that Novo will command a 45% market share.

But is this realistic? We are sceptical for a number of reasons.

Let’s us just try to use our common sense for a moment…

1/ Are we really going to prescribe $100 billion of drugs for conditions that can be largely remedied by eating less and doing more exercise.

2/ And is it likely that the GLP-1 market is going to be two-thirds the size of the $164 billion cancer industry. A disease that kills and can’t be cured by eating less and exercising more…

3/ Looking at it another way, the world’s largest selling drug in 2022 was HUMIRA with $21.6 billion sales. HUMIRA is a monoclonal antibody used to treat all sorts of miserable conditions such as rheumatoid arthritis, ankylosing spondylitis and Crohn’s disease. Can it really be correct that Novo’s GLP-1 sales will be almost twice large.

4/ Many say that it will reduce the incidence of heart disease and lead to significant cuts in heart related healthcare spending. The problem, however, is that once you stop taking Wegovy you rapidly put the weight back on. At $1,350 per month (US list price) are you really going to take Wegovy for life and suffer all the side-effects (more anon…). And at best maybe you delay by a few years the incidence of heart disease. But that cohort may well become susceptible to the more-expensive-to-treat cancer as they live longer?

But the enthusiasts among you will say that I am just a fat-denier?

Well let’s go into the detail…

5/ And this is important. Novo Nordisk say that patients are most likely to take the drug for four years. Independent research suggests something very different. A recently published Obesity Society study into ‘Early-and later-stage persistence with antiobesity medications’ link found that only 19% of patients remained on treatment after one year. Wegovy had the highest one-year persistence but still only 40% remained on the treatment after one year. Novo has said that they will present stay time data for Wegovy sometime in 2024…

6/ As we mentioned, most analysts expect Novo to have a 45% market share of the GLP-1 market (67% of expected 2028 Novo sales). But at the last count, there are currently 74 drugs in development…So many that Johnson and Johnson’s CEO, Joaquin Duato, said that ‘it’s too crowded for us’.

7/ But even if the market was to remain dominated by Novo and Lily, the Lily molecule seems to be more effective. A recent study into the ‘Comparative Effectiveness of Semaglutide and Tirzepatide for Weight Loss in Adults with Overweight and Obesity in the US’ link showed that the Lily drug was ‘significantly more likely to achieve 5%, 10% and 15% weight loss and experience larger reductions in weight at 3, 6, and 12 months’.

8/ An this is where it gets interesting. Did you know that 75% of all anti-obesity drug users are women? So we may well be looking at a market that is somewhat smaller than thought. Have a look at the BBC documentary The Skinny Jab Uncovered link. You may be surprised to learn that Semaglutide is freely available at knock-down prices in beauty salons across the country. There are even Tiktokers who sell it?! Have a look at the Forbes article link.

9/ So that leads us to the question of pricing. Budget Semaglutide seems to be freely available at an 80% or so discount to prescribed Wegovy. This must somehow undermine the price of the drug? In addition, The Inflation Reduction Act gives the power to the US government to negotiate prices for the largest Medicare drugs from 2026. But before then a ‘maximum fair price’ will be set for Wegovy in February 2024 which some analysts believe could lead to a greater than 25% price reduction.

10/ And we haven’t got to the side-effects yet. Wegovy and other GLP-1’s are linked to nausea, vomiting and diarrhoea.

There may also be a risk of thyroid cancer and suicidal thoughts. The FDA has received 265 reports of suicidal behaviour from patients taking GLP-1’s since 2010.

11/ So how big will the GLP-1 drug market really be? The modelling is fiendishly complex but for all the reasons that we discussed the market is likely to be a lot smaller than consensus forecasts of $100 billion sales. A leading in life science consulting IQVIA, estimated that the market could be worth anything between $17 billion and $100 billion.

Let’s say that stay rates are a year (not four), that Novo end up with say a 10% market share, that the cohort is predominantly female and that pricing is lower than expected…Then hey-presto Semaglutide could end up as $5-10 billion blockbuster. Still a big drug but not the $47 billion mega-drug that many expect.

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Disclaimers: This does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. This information generated by the charts, tables, and graphs presented herein is for general informational and general comparative purposes only. This document may contain forward-looking statements that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable, however, such statements necessarily involve risks, uncertainties and assumptions, and investors may not put undue reliance on any of these statements. References to indices or benchmarks herein are for informational and general comparative purposes only. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The information in this presentation is not intended to provide, and should not be relied upon for, accounting, legal, or tax advice or investment recommendations. Each recipient should consult its own tax, legal, accounting, financial, or other advisors about the issues discussed herein.

This article is authored by MOI Global instructor Ole Soeberg, founder of Nordic Investment Partners, based in Copenhagen.

Ole is an instructor at European Investing Summit 2024.

Looking at companies that have been winners over the past 10, 20 or 80 years it’s easy to see what have driven their performance. Identifying outperforming businesses for coming generations is much more difficult than finding potential winners for the next 5 to 10 years.

Long-term investing is very challenging

In early September 2024, I was reading a September 1944 issue of the New York Times. In the Business section, I came across a news brief about PepsiCola Company announcing a 2-for-1 stock split. After the split, PepsiCola would have 7.5 million shares outstanding. On that September day in 1944, PepsiCola had a market cap of $112 million. Fast forward 80 years to 2024, and Pepsi has a market cap of $233 billion and 1.35 billion shares outstanding. The annualized CAGR, excluding dividends, has been 10% since 1944. In hindsight, it’s easy to see that PepsiCola was a good investment.

However, the 1944 NYSE list was full of companies that no longer exist or have merged into other companies listed today. So, how do you find a company that will not only be around 80 years from now but also grow in value by 10% or more per year?

Which company would you invest in today and keep for generations?

Which company would you buy shares in today (2024) to hold and pass on to future generations, who would then reap the financial benefits of your foresight 80 years from now?

It’s really hard to predict which businesses will thrive over such a long-time span, as the average company tends to last only a few decades. In my valuation work, I only project 20 years forward and do not use terminal value after 20 years, as I believe corporate destiny (long-tailed terminal value periods) is arbitrary.

You can approach this by being rational and focusing on core essentials like housing, food, and other necessities, as they will continue to be in demand 80 years from now. A good housing location in a politically stable country will likely remain in high demand, but will it achieve a 10% CAGR like Pepsi?

Most investors have a horizon of just a few years and monitor fundamental performance and valuation along the way. Holding on for 80 years is outside the comfort and competence zone for most.

Current use of earth resources is not sustainable

A future oriented energy company could be worth holding for 80 years. I believe humans usage of planet Earth need to become more aligned to the sustainable use of our planet. And burning 300-400 million years old plants and biomass that have been in the ground under pressure and heat to become oil & gas in the current period is not a solid road into the next centuries.

Hence, we need to change our energy sourcing from fossil fuels to new sources. Solar, wind, hydro and nuclear all serves that path well and my pitch for MOI Global 2024 is Vestas, the global leader in wind turbines.

Energy sourcing is someday likely to come from fusion – same process as the Sun – and subsequently make current renewable energy sources obsolete. It is however still many years out, so for the next 10-20 years current renewable energy sources should be good.

Back to the mindset of most investors and the 80-year challenge. I would not bet Vestas Wind Systems is around a few years after fusion power or some other more potent power source becomes a reality.

Vestas: Self-help margin recovery story with a tailwind

Vestas is the idea I will present at European Investing Summit 2014, hosted by MOI Global.

Vestas is the world leader in wind power turbines and focused on Europe and North American markets. Due to an order book that did not appropriately incorporate higher costs for steel, transports etc, Vestas profitability plummeted as they had to shoulder the cost increases. All new contracts/order are made with better profitability and hence Vestas earnings are very likely to increase significantly in the coming years.

Vestas can probably work fine for the next 10-20 years as power from low carbon sources replace traditional fossil fuels, but its not a 80 year investment pitch.

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