Money managers are taking the “America First” philosophy to the stock market.
Money manager allocations to U.S. stocks are at the highest level in three years, research from Bank of America Merrill Lynch suggests. As professional investors turn their back on Europe and emerging market equities, it raises questions about what’s causing this sudden shift.
A Massive Reversal
Allocation to U.S. stocks is 21 percent overweight – the highest level since early 2015. In contrast, portfolio allocations from those money managers are down to 11 percent overweight – the lowest point since March, 2017.
Emerging market portfolio positions are softening, too. According to the Bank of America Merrill Lynch survey, portfolio allocations to emerging market stocks are down to 10 percent in the fall of 2018, the lowest level in two-and-a-half years.
Only six months ago, emerging market portfolio allocations were 43 percent overweight – a scenario that represents a massive reversal.
Money managers cite ongoing tariff battles, a softening Chinese economy and angst over rising global interest rates as pushing investment managers toward U.S. stocks, especially larger tech stocks like Apple, Google, Netflix and China’s Alibaba.
Back To The U.S.A.
The overriding reason so many institutional investors are flocking to U.S. stocks, however, is a simple one – the profits are larger on the U.S. corporate landscape.
Joel Litman, chief investment strategist at Valens Research, in Cambridge, Mass. said, “The biggest reason why investors are flocking to US equities is because of the strong fundamentals that are driving U.S. equities versus other markets.”
At Valens, company analysts use uniform accounting to remove distortions from one off issues (like the one-off adjustments that happened related to the recent tax
cut) and other accounting distortions to form their data on the global investing market.
“When we make all those adjustments, we see U.S. corporations as a whole having
their highest adjusted-returns of all time, and also seeing accelerating growth,” he said. “Using uniform accounting, we’re seeing double digit adjusted earnings growth for both 2018 and 2019.”
But why are investors taking funds out of other markets?
Litman said factors that uniform accounting and macro analysis evaluate are positive in the U.S., but are not as positive internationally.
“Inflation and capex cycles are much further along in much of the emerging markets, and in developed markets, that same uniform accounting earnings growth profile is not nearly as strong. That is driving the flight to the U.S.,” he said.
Keeping an arm’s length from companies and industries potentially impacted by ongoing trade wars is another go-to institutional investment strategy right now.
Paul Shelton, portfolio manager at Warwick Shore Advisors, in Orlando, Fla., said “The current fiscal and trade policy adopted by the White House has led to a global landscape in which domestic investing seems safer,” he said. “Consequently, many investors and portfolio managers like myself, have increased allocations to sectors and companies whose financials show low correlation to the effects of the escalating trade war. This trend has been at the expense of international developed and emerging market equity and debt securities.”
Additionally, the underlying fundamentals of the U.S. economy appear stronger than many international developed counterparts, Shelton said.
“This is evident in many economic indicators,” he said. “A large portion of money managers are reducing exposure to international developed and emerging markets to reduce excess portfolio volatility from headline risk. When the rising tide from trade negotiations begin to recede, the certainty of companies trading on fundamentals will increase. This will reintroduce a greater level of confidence in international investing.”
Uncle Sam Figuring It Out?
Changes in economic policy – especially here in the U.S. – are also driving investors away from overseas stocks and emerging markets, and toward domestic stocks, experts said.
“The preference of U.S. assets over international assets is due to the enormous pro-growth improvement in government tax and regulatory policy in the U.S. since the presidential election in 2016,” said James Juliano, a partner at Kairos Capital Advisors, an RIA specializing in asset allocation strategies. “Coupled with a U.S. monetary policy that has produced a stable to strong U.S. dollar, global investors have rushed to move capital into dollar-based asset classes with a preference for those assets most levered to U.S. economic growth, like stocks especially growth oriented sectors like technology.”
Similarly, the strong U.S. dollar produced by these improved domestic government policies have taken hold.
“That’s caused global capital to flee traditional weak dollar hedging assets like commodities and commodity linked emerging markets like Russia and Brazil,” Juliano said.
Looser regulations here in the U.S., especially compared to Europe, may also play a role in portfolio assets being steered toward the U.S.
“According to a recent article in Forbes, the overall flow of economically significant rules is around 27 percent lower than Obama’s last year in office,” said Timothy Weidman, an investor and retired business professor at Doane University, in Lincoln, Neb. “However, Trump’s figures also contain ‘rules’ that represent streamlining of pre-existing orders, so it is possible there is more deregulation going on. This bodes well for U.S. firms — especially when compared with the current regulatory environment in the E.U.”
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at email@example.com.
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