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Simon Brown: We're talking with Anton Eser, Chief Investment Officer at 10X Investments. Thank you, Anton, for today. In the memo you put out, which probably requires more time than we have, and is certainly a brave note, you say it's time to reconsider the weighting of U.S. stocks in global stock portfolios. states. Certainly over the last few years, 10 years in fact, it's been a great place to invest.Of course there are many [in the] It's been a great seven years, but the last five, 10, and even 12 years have been very profitable.
Anton Ethel: yes. Hello Simon. It's actually longer than that. You can almost trace it back to the late '80s when Alan Greenspan took over the Federal Reserve. The real return on US stocks over the past 30 years has been close to 8%, and over the past 10 years it has been over 9%. But as long as you invested as much capital as possible into the US stock market, it was a great ride.
Simon Brown: As part of the assignment, I want to dig into some of the issues, for example, that you raised in the article you published on tax cuts. There's no question they've driven both shareholder equity and some growth. Of course, at some point there will be no avenue for tax reduction.
Anton Ethel: Well, if you recall, it started during the Reagan administration in the 1980s. U.S. tax rates at the time were in his mid-40s, with some sort of steady decline. All elected Republican presidents have cut taxes, and Democrats have not raised taxes. So the average tax rate in the U.S. has gone from around his mid-40s to an effective tax rate of nearly 15% today. And it contributed about 0.8% to U.S. net income growth for the period. So we have a big tailwind.
Simon Brown: And that tailwind also helped. A closer look at the data shows that we don't expect much revenue growth going forward. The United States has grown, but is largely in turmoil. And if we look at multiples, we need better growth relative to the multiples that we're looking at.
Anton Ethel: Yes, that's exactly right. Let's step back a little bit and look at revenue growth. Over the past 30 years, the US economic growth rate has been 2.5%. And obviously, it's been a phenomenal time, there's been major American corporations, there's been the internet, there's been globalization. [and] Now it's artificial intelligence. But it's fascinating. Focusing on sales, top-line sales growth for US non-financial companies in the S&P 500 is less than 2%, resulting in real sales growth of 1.9%.
So throughout that incredible period of time, U.S. companies have actually grown less than the U.S. GDP. But more importantly, it's the tax cuts that have further accelerated EPS growth. In other words, the contribution is 0.8%.
And the second thing is, you know, the period of continued reduction in interest costs. The contribution of interest costs was 0.7%. Adding all this up means that almost 40% of the growth in earnings and his EPS growth in the US since the late 80's has come from interest costs and taxes.
The final point here is regarding valuation. At the time, his valuation was 15 times, but now he is over 30 times. Valuations are very sensitive to interest rates. Discounted at future interest rates. Therefore, most of the multiple economic expansions have come from lower interest rates over that period. This was the primary driver of his 7.9% real-term U.S. stock return over the past 30 years.
But as you say, in the last few years that has come to an end. So the outlook is very different going forward in terms of what we can expect from long-term returns in the US.
Simon Brown: That's the important point. We're not talking about a crash happening in the coming days or weeks. We're talking about the next 10 years or so. And a reversion to the mean, or a decline in growth rates, certainly suggests that we won't get the kind of returns we've had from stocks in previous decades.
Anton Ethel: Yes, it is. No one knows what will happen in the next six months, or even he 12 months. It's very difficult to predict. Long-term profits can depend on something other than numbers. So go back to them. If you look at the 10-year GDP forecast, which is actually he CBO, the US government, is too ambitious, it's 2%.
Now, just to crunch the numbers, let's assume we refinance at these levels and the tax rate remains incredibly low, because next year's Trump tax cut rolls over and all that. It remains at a very low 15%. Calculated as a percentage, the U.S. earnings growth rate is 1.8%. This is actually making a pretty bold assumption. In other words, profits are in line with GDP, but have been less than GDP for the past 60 years. And then calculate that 1.8. % And then you put that into the model and you get the valuation multiple, which is the number 30 that I mentioned earlier, and it's kind of like a mean reversion.
And if we take the optimistic side again and bring the average back to a much more recent multiple of 26, the real return starts to hit just over 1%. And if you do long-term valuation, the expected real return for U.S. stocks is actually negative at 0.6%.
So this is a huge change in the world that we've lived in over the last 30 years, and also the world's largest markets with real returns of 8%, 9%, and actually going from 0 to 1% over the next 10 years. It will get closer. , it just completely changes the dynamics of how you manage your retirement portfolio.
Simon Brown: So what happens to investors looking for good old-fashioned quality dividends, valuations and, of course, bonds that are currently having their fun in the sun?
Anton Ethel: yes. I think there are two or three points here. First of all, absolutely, I think the first point is that for the first time in a long time, real return expectations and bonds are attractive, whether it's in developed markets or certainly in the South African market.
Second, emerging markets outside the US are much more attractive than using the same calculations considered here.
And then the third point, and this is an important one, is, as you say, very distorted by the big tech companies in the United States. For example, if you weight the S&P 500 more evenly, the numbers become much more attractive. And a lot of it leans heavily towards defensive plays. A household name is trading at a much more attractive price. It's a valuation that has actually had pretty good earnings growth over the past 10 years.
These are the three practical actions you should take. Whether you think long-term or short-term is a completely different story.
Simon Brown: Leave it as is. Mr. Anton Eser, Chief Investment Officer of 10X Investments, thank you for taking the time.
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