Is the US too big to ignore? – why the economy matters to investors

Why should a single country’s economy, or perhaps that of a wider region, impact our choices when investing?

Experts tend to look at various factors to assess the state of an economy, like inflation, unemployment levels, as well as the level of inequality in a country.

But the metric that’s most commonly used is a country’s growth in gross domestic product (GDP).

GDP is how much income is generated in the country from the sale of its goods and services. An increase in GDP means the economy’s growing, a decrease means it’s shrinking.

When looking at GDP, size matters. And here’s why it matters to investors.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. Investments can fall as well as rise in value, so you could get back less than you put in.

The US is gigantic

Not just in terms of landmass though.

The US economy is miles ahead of all of the other countries, with a GDP of almost $23trn in 2021. In comparison, the UK’s GDP sits at just $3.2trn.

Of course, population size plays a part in the disparity between the US and UK. But even when that’s taken into consideration, the GDP per capita in 2021 was around 38% more in the US than it is in the UK. GDP per capita is the amount generated by every single person in the population.

So, as far as economic power is concerned, the US is certainly the one that sits at the head of the pack.

What about the stock market?

For investors, in stock market terms, the US dominates.

By far the two largest stock exchanges in the world are the NYSE and the NASDAQ – both located in New York City. Taken together, the value of the shares listed on these two exchanges had a combined market capitalisation of over $40trn – that’s more than the next eight largest stock markets combined.

Some of the most popular companies in the world are also listed in the US, but might not spring to mind when thinking US investments, for example, Manchester United PLC. There are currently over 400 non-US companies that have their primary listing on a US stock exchange.

Why the economy matters

We believe the US is a region that’s simply too big to ignore.

Given its impact on finance globally, it’s not surprising that many investment experts believe that, when creating a diversified portfolio, the US should undoubtedly feature.

The sheer size of the US market, and the market capitalisation dominance of a relatively small number of companies, especially over the last five to ten years, does, of course, bring its own challenges.

One of these is it can make it more difficult for fund managers to find opportunities missed by others and to consistently outperform the broader market over the long term.

However, we think there are some experienced managers that are well equipped to find opportunities, and have the potential to succeed over the long term.

Investors should be mindful that US funds can come in different guises. For those looking for income, it’s worth knowing the largest US index had a yield at the end of 2021 of just 1.27%. In comparison, the UK’s index of biggest companies yielded 3.18% in the same period. So, it’s no surprise that lots of funds investing in the US prioritise growth, rather than income. Remember though, yields are variable, and no dividend is ever guaranteed.

Some funds focus on the largest companies in the market, usually those within the S&P 500 Index. Others look for opportunities among small and medium-sized companies, in some cases in concentrated portfolios, which might offer greater growth potential, but are higher risk.

Looking to invest in the US?