Global Investors Rotating, Not Retreating
$DIA, $DAX, $DJSH, $N300, $NSEI
Global equities have recovered rapidly after a dip this month as technology firms sold off, signalling the investors are still confident about the last of the Trump reflation trades, as they take a more discerning approach to stock-picking.
Despite that recent stumble, MSCI’s gauge of world stock markets is less than 1% below its record highs and investors continue to shovel money into equities.
In the week to Wednesday, global equity funds pulled in $24.6 billion, according to the latest data from Bank of America Merrill Lynch and EPFR. That was the biggest week of equity inflows since the U.S. election in November.
Stocks are attractive, and my work shows that here is still money aka dry powder, on the sidelines.
The market has is still seeing lower inflation numbers, a more hawkish Fed and somewhat less rosy economic data. That indicates that people who are in do not want to get out.
The June dip threatened to put stocks on track for their worst 2-week run since Donald Trump won the US Presidential election with vows of tax cuts and infrastructure spending that excited investors.
Several elements of the global reflation trade have unwound, as inflation expectations have fallen, the USD has given back its post-Trump election gains Vs major currencies, and commodities, led by Crude Oil are in a Bearish mode.
European and Japanese shares have reversed all of their outperformance Vs other regions, while the sell-off in tech stocks that began with the US FAANGs, was seen by some as a sign of wider problems.
Investors put the recent falls at broad index levels down to rotation aka “Churn” between sectors and geographies as funds lock in profits in certain highly valued sectors, such as tech, and look to pick up bargains in rally’s laggards.
But double-digit EPS growth and attractive dividend yields backed by a broadly upbeat global economy are enough to underpin demand for equities,
When any market pauses into the Summer it is most often a good opportunity to put sidelined cash to work.
Global stocks currently trade at about 16X forward earnings, in line with their average over the past 20 years. Corporate profits are expected to grow 13% over the next year, that the brightest outlook globally in 6 years, according to Thomson Reuters data.
But imprecise US economic data, a more aggressive tightening stance from the Fed, and BOE, plus worries about valuations in stocks most closely geared to economic growth have spurred shifts in managed money allocations.
“Beneath the surface a more nuanced and multi-layered investment backdrop is emerging,” said a note from UBS Asset Management.
Underscoring both the shifts in allocations and wide divergence within regions, a league table of global stock market performance so far in Y 2017 throws up a contrasting picture compared to previous years, the statement said.
In terms of sectors, the weakness in tech and segments such as industrials, chemicals and capital goods, which are sensitive to the broad economic outlook, has led to a pick up in other, less favored stocks.
Safe-haven sectors such as food and beverages or consumer staples, sometimes considered bond proxies because of their reliable, coupon-like dividend payments, are back in favor.
Procter & Gamble (NYSE:PG) shares have rebounded nearly 5% over the past month, and Unilever and Nestle are close to record highs outpacing the broader market’s gainers.
After a brief slowing, financials stocks, often with large weightings across global markets, are back in favor.
In the United States, a combination of an expected pick-up in lending and lighter regulatory and compliance requirements have made the sector attractive, said a portfolio manager at Federated Investors in the US.
Worries that tighter Fed monetary policy might upset the optimism over equities are being set aside for now, with some saying a backdrop of healthy corporate earnings mean investors may see rising interest rates as a sign of a strong economy.
Notably, as the Fed gets more active it will throw gasoline on a fire and not cold water.
Daily, pre-US market open we publish my Briefing on the Key global markets: Forex, Commodities and Stocks, click here please.
Have a terrific week.
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