Valuations are expensive, there’s an unpredictable egoist in charge of the economy and stock market growth has been heavily geared to a number of companies whose moral position now looks dangerously in doubt. So why are investors moving back to the US markets?
- Global investors have moved overweight US equities for the first time in 15 months
- The US still has some advantages over other developed markets
- Global investors are being drawn in by stronger earning from US companies
The most recent Bank of America Merrill Lynch (BofAML) survey showed that global investors have moved overweight on the US for the first time in 15 months, at the expense of emerging market and European equities. Allocations to US equities rose 16 percentage points to a net 1% overweight.
This seems odd on a number of measures. The US market appears significantly over-valued relative to its long-term averages by around 65% to 130% depending on the measurement. Recent growth has been heavily dependent on the FAANG stocks – around 85% of the overall return from the S&P has come from technology.
This may be partly the lesser of a number of evils. The other developed economies make for an unedifying choice. Japan has seen economic growth slip in recent months, in spite of an unprecedented monetary and fiscal stimulus programme. Europe has had to contend with the re-emergence of political risk, as the Italian elections reminded investors that the European project is not without its vulnerabilities. The UK is, well, the UK.
Then there is the earnings picture. The respondents on the Merrill Lynch survey were clear that the US was the only global region to have a positive outlook for profits, a 17-year high. The most recent earnings season saw many companies outpace expectations, buoyed by lower corporate tax rates. While emerging market companies have seen similar growth, this has not been matched in Europe or elsewhere.
There may be something else at work. Amid general nervousness about the state of the global economy, the US tends to be seen as a safe haven. Investors have also been looking at gold, suggesting they are becoming more concerned about global growth. Perhaps they simply believe that the US will win a global trade war.
There are sound reasons to move back towards the US – valuations are a little better today following the recent volatility and better earnings. However, the return to US assets still appears anomalous.