Investors should be chasing opportunities outside the US despite the positive outlook for the country’s equities, as Europe and emerging markets start to re-emerge after their five-year slowdown, JP Morgan Asset Management has argued.
In JP Morgan’s third quarter guide to the markets, outgoing chief market strategist for the UK and Europe Stephanie Flanders and her team point out European equities as well as emerging market stocks remain a better choice for investors than the US in terms of “slightly cheaper” valuations as well as higher earnings and margins.
The “common perception” is that US equities are set to benefit from the promise of a fiscal stimulus from Donald Trump’s administration, and JP Morgan notes that high valuations could persist for some time.
JP Morgan global market strategist Mike Bell says: “Continued healthy earnings growth with upside risk from potential fiscal stimulus and late-cycle exuberance certainly argues against going underweight US equities at this stage.”
But he adds that many investors might have missed out on the rally in European equities now that political concerns in the region seem to have subsided slightly.
He says: “Flow data suggests that political concerns led to very large outflows from European equities last year and that those flows have only recently started to return.”
The team says year to date, equity flows into Europe are up €18bn (£14bn), which compares to the €58bn outflows seen in 2016.
According to the Investment Association, equity was the best-selling asset class in May, attracting net retail inflows of over £1bn with European equities sectors recording their largest monthly inflow since September 2015 with net sales of £343m.
Following Japan, North America came fourth in the sector rankings with £147m inflows over the month.
Overall, Flanders argues the global economy has not produced any “nasty” surprises since the beginning of 2017 with both politics and economics bringing confidence back into the Eurozone “for a change”.
However, the focus will remain on central banks and whether they will continue to influence market sentiment as they did in previous years.
She says: “Now, especially, investors need to decide which is more important for asset markets: monetary policy or the underlying state of the recovery.”