Monthly fund manager survey finds little enthusiasm for US equities as Trump trade weakens.
- Allocations to US equities slumped 40 percentage points in the most recent Bank of America fund manager survey
- European equities jumped 27 percentage points over the month
- Robeco research suggests small caps should also be on investors’ radar
It appears that investors’ long-standing love affair with US equities may be drawing to a close. Apart from the obvious symptom of declining markets, the most recent Bank of America fund manager survey showed allocations to US equities had slumped 40 percentage points. Who wins from America’s loss?
The survey showed that European equities have been the strongest beneficiaries to date. They jumped 27 percentage points in the same month – their highest level since July 2021 and the biggest shift out of the US and into Europe since 1999. Other beneficiaries included the unloved UK, which saw new interest from fund managers. Emerging markets have not yet featured in US weakness.
Waning enthusiasm for technology stocks was part and parcel of a distaste for US markets. These had been the most expensive part of an expensive market and fund managers moved to a net 12% underweight in the sector. Instead, fund managers found new enthusiasm for utilities and banking stocks.
This shift in investor preference has already been reflected in market performance since the start of the year. The S&P 500 is down 3.5% for the year to date, and the Nasdaq has dropped 8.1%. The Eurostoxx 50, by contrast, is up 12.5% since the start of the year, and the FTSE All Share up 5.2%.
But are investors looking in the right place? Europe tends to be the favoured option when the US wobbles, but the mega-cap technology trade has absorbed a lot of market oxygen and there are plenty of other over-looked growth options in the market.
Recent research from Robeco's Quant Equity Research team suggests that on a pure earnings growth and valuation point of view, small and mid caps should be getting a closer look. The research divided recent equity returns into earnings growth and multiple expansion. It found small-caps in particular had delivered strong earnings growth but lagged due to stagnant valuations. In other words, they had been held back by sentiment rather than performance.
It also suggests that fund managers may be right not to look at emerging market equities just yet, where recent weakness is far more attributable to weak earnings growth. The Robeco research found that Taiwan and India were exceptions, but China, Korea, and EMEA were all weak.
David Blitz, chief researcher at Robeco's Quant Equity Research team, said: “Ultimately, small-cap and low-volatility stocks suffer from a lack of investor appreciation, while emerging market equities need a turnaround in operating performance… the healthy fundamentals of small-cap and low volatility stocks indicate potential future opportunities.”
The possible end of the mega-cap technology trade would make for a more interesting moment in markets. Finally some fast-growing, but unloved areas would get their moment in the sun.
