“We have seen six quarters of negative earnings revisions for US stocks, yet the price/earnings expanded. It is almost as if people were looking at something totally different to what they normally look at to determine that figure.”
With more political figureheads and pundits making a show of addressing the anxieties of an increasingly vocal populist faction, domestic stocks stand to benefit.
Says Brookes: “It could be that we are seeing a switch away from large cap toward small and mid-caps again. All of the consumer stocks tend to be large caps so with a little more domestic pickup in the US, UK and Europe, there could be quite a transition, meaning portfolio constructors need to change 30-40% of their portfolio.”
Having said this, Brookes is not as sold on US and European equities as he is on the UK equity value story. In the US, the high stock prices, rather than the economic environment, are convincing him to maintain an underweight position.
And because exploiting the European value theme means going overweight in financials, Brookes has been selling down his overweight exposure to European equities during 2016. He says: “We might even decide to go underweight next year.”
