Despite the recent stock market corrections, US equities remain out of favour among asset allocators...
Despite the recent stock market corrections, US equities remain out of favour among asset allocators on the basis of their high valuations..
Bob Yerbury, chief investment officer at Invesco Perpetual, is significantly underweight the US in each of his three global portfolios. He says despite a number of tangible signs of economic recovery across the Atlantic, the recent spate of accounting scandals, such as those at WorldCom and Xerox, continues to depress equity prices.
'Economic indicators have shown further evidence of an economic upturn, Yerbury says. 'Durable goods orders grew by 0.6% in May and have risen for five of the past six months. That, together with a 56.3% rise in the ISM Manufacturing Activity Index in June, its highest rise since February 2000, clearly indicates a recovery in the manufacturing sector.
'Although retail sales fell back in May, this followed seven consecutive monthly increases and, for the first quarter, overall GDP growth is estimated at 6.1% at an annualised rate.'
Despite the growing number of economic indicators pointing toward a US turnaround, Yerbury is finding better opportunities in the more robust UK and less correlated Japanese markets.
He says domestic demand is increasing in Japan, which will counteract the negative pressure on exporters exerted by the weakening dollar. Yerbury believes although the UK equity markets have performed poorly of late, some sectors, most notably property, have seen strong growth.
Mary Davis, an analyst at Credit Suisse First Boston, also points to the dislocation between US economic and stock market performance. She identifies a number of improving macro fundamentals but warns of falling levels of consumer spending. Consequently, she has revised down her expectations of US GDP growth in 2002 from 2.8% to 2.5%.
Davis is favouring Asia excluding Japan in terms of growth potential because she feels the Fed is unlikely to lift rates this year, facilitating continued strong liquidity in the region for the short to medium term at least. She believes Asia excluding Japan can post GDP growth of 6.7% by the year end.
Davis says: 'Foreign portfolio inflows typically surge into Asia toward the end of a period of low interest rates in the US but also recede as US interest rates start rising. The longer it takes for a US rate hike, the stronger Asia's external balances will look. Free liquidity should peak in the third quarter as economies rebound strongly.'
Michael Taylor, head of equities at Threadneedle Investments, says the heavy market corrections have compressed P/Es among the more high beta sectors. As at 14 June, he notes, 12 of the UK's 18 sectors were trading within 20% of the market's P/E, compared with just five sectors at the top of the market in March 2000. The three most heavily rerated sectors are technology, telecoms and media.
Taylor says these corrections have made valuations more attractive, although he favours the mid and small-cap arena, not only for growth but through a desire to avoid further accountancy scandal-ridden companies.
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