Truth creates light

US capital: Diversifying abroad, imperfect access

The US equities market is the largest in the world, accounting for c 40% of total world market capitalisation. There is a culture of share ownership; over 50% of US households own equities and there is a rich ecosystem servicing this market. US investors are increasingly looking to diversify away from the home market: c$11.9tn of their holdings are in non-US equities, up 67% from $7.1tn in 2016, and we expect this trend to continue. ESG capital pools are growing, yet US equities are current laggards in ESG terms. Meanwhile, the growth companies that have largely driven US equity market performance now face headwinds in an environment of rising inflation and interest rates, making investors look again at diversifying their portfolios both in terms of sector and geography.

For non-US issuers the growing demand for non-domestic securities presents an opportunity to add US investors to their share registers. However, comprehensive access to qualified investment pools in the United States is far from straightforward, with changing market structuresaking it more challenging for issuers to access the market.

We describe this gap between the total pool of and readily available capital for issuers as ‘dark capital’. Appropriate access to these pools of dark capital requires an appreciation of current market dynamics and sophisticated marketing approaches to raise their profile. As a capital markets analogy to the Washington Post’s slogan ‘Democracy dies in darkness’, we are of the view that in a world of dark capital, ‘Truth creates light’. 

Advice from Rachel Carroll, head of our US office

We interview Rachel Carroll (see pages 14 and 15 of this report). She highlights that in the US over the last 20 years, there have been significant changes in the financial services industry and the impact on the field of investor relations has been pronounced. Her advice for issuers would be to take ownership of their capital markets strategy and the challenges of navigating an increasingly fragmented ecosystem where much of the capital sits outside the reach of traditional sell-side channels.

Flow data show a move out of growth

Morningstar data show that to the end of Q122 there has been a consistent rotation out of US growth since 2019, as investors have locked in gains and diversified into blended and value strategies. Q122 data suggest bond market funds were in aggregate seeing outflows, as did money market funds. By contrast, flows to equity seem relatively well supported, perhaps buoyed by the lack of inflation compensation from other asset classes and a corresponding focus on ‘real’ assets. Through 2021 value strategies started to see a comeback, as did flows into international equities, which continued into Q122. Many were starting to rotate portfolios for the post pandemic reopening and positioning into cyclical names. The flows into European names reversed in late February 2022 according to Lipper and iShares data, responding to the invasion with flows coming back to US equities, which were seen as more insulated from the geopolitical shock compared to Europe.