Do you fear a 'Trump Slump'? We reveal how to diversify an Isa away from the US

US Market Confidence Falters Amid Trade War Concerns

Investor confidence in US markets has significantly decreased following years of substantial growth, as President Trump’s trade wars ignite recession fears across the Atlantic. This downturn underscores the importance of portfolio diversification, particularly reducing exposure to potentially volatile US stocks.

Investment Experts Advise Diversification

Typically, investment professionals recommend weathering economic turbulence and market corrections. They generally advise against making abrupt changes to investment portfolios in reaction to short-term events.

However, experts have cautioned for some time about the over-reliance of many investors on US markets due to its prolonged period of success.

Individuals invested solely in global tracker funds may find that over two-thirds of their capital is concentrated in the US, frequently in dominant technology companies.

The ‘Magnificent Seven’ Tech Stocks Under Pressure

The prominent ‘Magnificent Seven’ tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – have faced considerable headwinds and declines so far this year. This highlights the risk of over-concentration in specific sectors, especially within a single market like the US.

Previously, we have outlined strategies for refining investment portfolios, including rebalancing away from sectors and markets that have become disproportionately large within holdings due to strong performance.

This article explores methods for diversifying investments away from the US, aiming to mitigate the impact of geopolitical instability and economic shifts on overall portfolio performance.

The Significance of Portfolio Diversification

According to Jason Hollands, managing director at Bestinvest, US stocks have experienced turbulent weeks since reaching market peaks in mid-February. He notes that the ‘Magnificent Seven’ have particularly felt the impact.

‘Investors have reacted negatively to the uncertainty surrounding US trade policy under the Trump administration. Overinflated valuations in US mega-cap tech stocks have been particularly vulnerable,’ Hollands explains.

‘Tesla, in particular, has been at the center of this volatility, facing company-specific challenges related to boycotts and protests stemming from Elon Musk’s political engagements,’ he added.

Hollands points out that US markets have already entered ‘correction’ territory, signifying a drop of 10 percent or more from their highest points.

‘Recent market behavior has contradicted the optimistic narratives of “US equity market exceptionalism” that were prevalent just months ago. The discussion has now shifted towards the possibility of a ‘Trump slump’ for the US economy later in the year.’

However, Hollands believes it is premature to forecast a US recession despite the disruption caused by Trump’s unpredictable tariff policies and strained international alliances. He suggests that the high valuations of US big tech companies were inevitably due for a correction.

‘Recent market shifts emphasize the critical need for a well-diversified portfolio,’ he states.

‘Many investors have progressively increased their exposure to US equities, leading to extreme concentration as the Mag-7 stock valuations soared.’

Hollands provides diversification strategies below, but suggests that reassuring signals from the Federal Reserve or a moderation of aggressive trade rhetoric could rapidly restore market stability.

‘Currently, President Trump is adopting a firm stance. However, based on his previous administration, he views US stock market performance as a vital indicator of success and is unlikely to disregard these market movements.’

The ‘Magnificent Seven’ Dominance in S&P 500

Darius McDermott, managing director at FundCalibre, highlights a trend: ‘Over the last decade, 92 percent of new investments in UK-domiciled funds have flowed into passive, index-tracking strategies, primarily targeting the S&P 500 and global indices.’

‘While this strategy has been successful in recent years, many investors may have inadvertently accumulated more exposure to the US market than they realize.’

He indicates that the ‘Magnificent Seven’ now constitute 37 percent of the S&P 500’s market capitalization, while only five companies comprise almost 20 percent of the MSCI World Index.

‘This implies that numerous portfolios are not only overweight in the US, but also heavily concentrated in a limited number of companies. Although the US remains an innovation hub, recent market volatility highlights the necessity of diversification.’

McDermott explains that benchmarks are retrospective, and investing in an index essentially means investing in past top performers.

‘If you anticipate a new global order, it may be prudent to reassess your exposure and reallocate capital towards future growth opportunities.’

Gabriel May, head of treasury at Trading 212, notes a rising interest among their UK clients in exploring domestic and European opportunities, driven by a reconsideration of their US stock allocations.

‘Recent geopolitical events have notably increased interest in the European defense sector, with companies like the UK’s BAE Systems and Germany’s Rheinmetall gaining significant attention.’

‘Technology and innovation centers, especially in artificial intelligence and data analytics, are becoming increasingly popular.’

‘Furthermore, established brands in aerospace, transportation, and manufacturing consistently maintain investor appeal.’

Strategies for Diversifying Away from US Markets

McDermott suggests a method for global diversification: ‘One approach to achieve this while maintaining a globally diversified portfolio is through actively managed funds with a differentiated global allocation.’

‘For instance, Ranmore Global Equity allocates only 19 percent of its portfolio to North American equities, significantly less than the index’s 75 percent, while holding 35 percent in Europe and 16 percent in China.’

‘This fund has consistently achieved top-tier performance.’

‘Other noteworthy funds include Lazard Global Equity Franchise, with 37 percent allocated to the US, and WS Montanaro Global Select, which has 47 percent and broad diversification across large-cap stocks.’

‘These funds can serve as valuable additions to a global or US tracker, providing a more balanced and comprehensive approach to global investing.’

Fund Examples for Global Diversification

• Ranmore Global Equity (Ongoing charge: 1.00 percent)
• Lazard Global Equity Franchise (Ongoing charge: 0.81 percent)
• Montanaro Global Select (Ongoing charge: 0.9 percent)

Hollands suggests that investors concerned about excessive exposure to major US tech stocks could consider an equally-weighted tracker as an alternative way to access US equities.

He recommends the Xtrackers S&P 500 Equal Weight UCITS ETF or a fund that weights US companies based on fundamental factors, such as the Invesco FTSE RAFI 1000 ETF.

Hollands explains that the latter includes the 1,000 largest US listed companies but weights them based on book value, cash flow, sales, and dividends rather than market capitalization.

He adds, ‘As investors consider year-end ISA choices, it might be opportune to explore markets they may have neglected in recent years, such as emerging markets, Europe, and even the currently undervalued UK.’ His recommendations in these sectors are listed below.

Alternative US Equity & Regional Investment Options

• S&P 500 Equal Weight UCITS ETF (Ongoing charge: 0.20 percent)
• Invesco FTSE RAFI 1000 ETF (Ongoing charge: 0.39 percent)

Regional Investment Tips Beyond the US

• Templeton Emerging Markets Investment Trust (Ongoing charge: 1.06 percent)
• Liontrust European Dynamic (Ongoing charge: 0.85 percent)
• Fidelity European Trust (Ongoing charge: 0.77 percent)
• Artemis UK Select (Ongoing charge: 1.27 percent)
• Temple Bar Investment Trust (Ongoing charge: 0.56 percent)