The shifting sentiment towards US equities comes as the market has staged a steady recovery from its volatile start to the year when the S&P 500 recorded is biggest monthly fall in two years during February. By contrast, a string of solid earnings reports from the big US banks and strong demand for US tech companies saw the S&P 500 reach on Friday its best closing level since those falls in early February.
Dislikes change
Last Word Research found that during the first quarter of 2018, US equities were the second most disliked asset class, but they have now moved down to be the fourth most disliked, having been overtaken by developed market corporate bonds, developed market government bonds, developed market high-yield bonds as more disliked.
In Q2 of 2018, sentiments towards US equities have improved. Fewer investors expect to reduce their allocations and more are looking to add to their weightings causing the net sentiment line to move upwards towards neutral.
Source: Last Word Research
Sentiment for the asset class was the most negative in Q2 of 2017 when almost half of fund selectors expected to reduce their US equity fund allocations. A further 41% looked to hold, 7% to increase, and 3% did not use the asset class.
Quality for late cycle
According to JP Morgan Asset Management global market strategist Nandini Ramakrishnan (pictured), the US is pulling ahead of other geographies in terms of GDP and was expected to grow 3%, while the rest of the world is tipped for 1-2% growth.
Ramakrishnan noted that, while things were going well in the country and growth was robust, there were risks, largely that the general economic cycle is ending and some pricing within the equity market was very high.
“As we think about later cycle mentality and a playbook for when US growth slows down, quality as a factor is key,” she said.
“It (quality companies) tend to outperform in times of US recession and is one area that might not have been a focus when the synchronised recovery was in full force and we were in early mid-cycle but now a bit more focus on quality stocks is appropriate.”
On tech, Ramakrishnan said valuations for some firms were quite high and it was tricky to see the upside during this late stage of the economic cycle.
“I wouldn’t say that as a sector that it screams an attractive opportunity, it is dependent on the company itself and how it is geared into global forces,” she said.
Value in non-FAANG market
KBI Global Investors chief investment officer Noel O’Halloran said while there were good reasons to be positive on the US in terms of the economy, inflation, and the Fed’s decisions, he did not see the US being more attractive than other geographies.
O’Halloran noted that selectors should be worried if a fund was investing in the same way in US equities as it did three years ago as there was now a dislocation in the market through a narrowly-led bull market. He put this down to impact of the FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks, and pointed out if the FAANG stocks were excluded, the US market would actually be down this year.
“The real value in the US is the non-FAANG market. People are complacent about FAANGs and when I look at some of the profit-to-earnings ratios I don’t think they’re a good investment,” O’Halloran said.
“I’d be more value oriented across all sectors. I’m not negative on tech but I’m negative on a very narrow leadership within tech. There are plenty of attractive stocks that are not FAANGs like Microsoft that are paying very attractive dividend yields and have strong cashflows.
“In a few years time the FAANGs won’t be seen as the market leaders for creating value which is why I would look to other tech stocks.”
