“The US market is not the place you want to be,” Paolini said.
According to him, there is a disconnect between the valuations of US equities and how the economy is faring.
Given the improving economic situation in the US, Paolini understands why US equities are trading at a premium. But they are now trading at a premium of, on average, 30%, and that is too high, he said.
“The economic momentum has already peaked. So it is difficult at this point to expect a further acceleration of economic growth,” he said.
The market is not reacting much to positive news, such as improving unemployment rates in the US, which is an indication that a lot of the positive news has already been priced in, he added.
Paolini believes European equities provide better investment opportunities than US equities.
“This could be the trade of the century. You buy a market that is roughly 20% cheaper than the US and you buy it in a cheap currency,” he said.
He acknowledged, however, the potential risk of political disruption in Europe, but said investors should not overestimate the short-term impact of the elections.
He cited as examples the Brexit vote and the US elections last year, which caused immediate volatility, then recovered quickly.
Besides Europe, Paolini also likes Japan and emerging Asia. According to him, these markets will benefit the most from the recovering global trade and industrial production.
He believes that Japan is one of the best markets globally in the next six to 12 months.
The Japanese yen is cheap and the market is very exposed to the industrial cycle, he said. Japanese equities also have cheap valuations and companies are expecting strong corporate earnings momentum.
“And you have probably the only central bank that is committed to even more quantitative easing,” he said.
For emerging Asia, the firm likes the technology sector.
Taiwan, Korea and China benefit from the growth in demand for technology because they have substantial tech manufacturing industries, Paolini said.
He also likes the financial sector in emerging Asia. In particular, banks, which he believes will benefit from rising interest rates.
