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3 Big Risks That May Cause a Crash: Morningstar


  • Being light on US stocks in your portfolio can be a good thing when the market is overvalued.
  • Morningstar’s global CIO told Insider he’s not putting new money into US equities at current levels.
  • He also warned of three big risks that he thinks could cause a market crash if they come to pass.

When the US stock market is unattractively valued, it’s fair to say equities as an asset class are too.

This is because of the dominance of US stocks in global terms. Something that is not as widely understood as it should be is that US equities account for well over half of the entire stock market, at 54% (57% with Canada added) according to MSCI, though the US accounts for only 4.2% of the world’s population.

American retail investors tend to focus on their home market to such a degree that they manage to be heavily overweight US shares while investors outside America are underweight US stocks versus the index — which can be a costly mistake in a

bull market


Being light on US stocks in your portfolio can be a good thing when the market is overvalued, as some seasoned investors think is the case right now.

Morningstar’s global chief investment officer, Dan Kemp, is among them. He told Insider in a recent interview that the portfolios he oversees were broadly not putting money into US stocks at the moment, even after the big sell-off in January.

“US technology assets were very richly priced, obviously benefiting from the very low level of interest rates. So we’ve seen them as overvalued for a while, notwithstanding the quality and the growth there,” he said.

“Although we’ve had a bit of a correction, US technology still looks very overpriced, and because of the weight of tech in the index, US equities are beyond the boundaries of what would be an attractive investment,” he said.

Kemp said he would need to see a 10% fall in the US market to consider allocating significant fresh capital to the asset class — though that would have to be relative to other markets and wouldn’t apply if all equities markets declined together.

“At 10% lower, the US would not look absolutely cheap. It needs to go well below that, and you’re looking at 20% before it starts looking attractive in those terms,” he said. “But because of the quality of that market and the quality of the companies there compared to other parts of the world, it could become attractive again sooner on a quality-adjusted basis or risk-adjusted basis.”

With the biggest equities market in the world overvalued, investing well becomes more difficult. In a broad downswing, there will still be pockets of opportunity, and Kemp and his teams have identified some.

Finding sectors to…


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