View the article online at http://citywire.co.uk/money/article/a1007963
Trump trade: time to take profits on pricey US stocks?
As the 'Trump trade' shows signs of faltering in the US, experts assess whether other global markets are able to take up the baton.
As the 'Trump trade' shows signs of faltering, some investors are getting nervous about the prospects for a US stock market trading on lofty valuations.
With the S&P 500 trading on a price-earnings ratio of over 21 times, high stock market levels have even attracted the attention of the Federal Reserve, which notes in the minutes of its latest policy meeting that 'some participants viewed equity prices as quite high relative to standard valuation measures'.
US markets rallied strongly after Donald Trump's election as president, on hopes his plans for tax cuts and infrastructure spending could deliver stronger economic growth.
But they have largely traded sideways over the last month, as Trump's failure to implement healthcare reforms raced questions over his ability to deliver on the rest of his pledges.
David Stubbs, global market strategist at JPMorgan Asset Management, said that rising corporate earnings should continue to support stock market levels in the US, but questioned whether the market would continue to outpace other regions.
‘Since the financial crisis the US has been the place to be,’ he said. ‘In the future Japan, emerging markets, the UK and Europe all look interesting and there is a case for all of them.’
Marcus Brookes, head of multi-manager at Schroders, said the fundamentals of the US market were ‘looking better than they were’ but still believes the ‘US market may go sideways or devalue’, allowing Japan, emerging markets, Europe and Asia to ‘close the valuation gap’.
‘I don’t think we’re going into a US bear market by any means, but assuming current growth can persist then I can see money moving back out of the US and portfolios being rebalanced,’ he said.
Stubbs predicted emerging markets would be a ‘structural growth story’ over the next 20 years and said the pessimism that forced people out of the market had ‘turned around’.
‘People have realised that this world with the new [US] administration is not automatically bad for emerging markets and the strong dollar is not the end of the world,’ he said.
‘In terms of earnings expectations, Asia is going to continue to be important and... [for] people looking for a route out of the US, then this is their first call.’
Stubbs also believes fortunes are changing for Europe despite the political uncertainty that surrounds elections in France and Germany.
‘The economic case for Europe has been building for a while...the question is has time arrived for Europe to outperform?’ he said.
He said that Europe was still cheap but the European stock market had underperformed the US due to its higher weighting to commodities, industrials and financials.
In particular the banking sector has caused a number of concerns as European banks had not seen the recovery enjoyed by the sector in the US.
‘There have been low levels of interest rates and banks have underperformed but if you think commodity falls are behind us, and that the banking system is getting better and interest rates are going up a bit, then the stars are aligned for better performance in Europe,’ he said.
Jeremy Podger, manager of the Fidelity Global Special Situations fund, said the political uncertainty in Europe continued to make the region a ‘special situations case’ and ensure it is out of favour with investors.
‘Should the situation improve, there is upside in these markets,’ he said. ‘At this stage, however, market valuations remain polarised, with defensive stocks still trading at rich valuations and cyclicals reflecting pockets of value. Here we are currently favouring corporate change situations and infrastructure spending beneficiaries.’
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by Daniel Grote on Apr 28, 2017 at 10:36