That said, its stance on US equities is rather clear: “In some ways, our view on US equities is the opposite of our view on European, Japanese and GEM equities. This is why we leave our comments on 43% of market cap to the end.”
- Why do we remain underweight? (1) The US market has the lowest operational leverage, and thus it tends to underperform against a backdrop of rising global PMIs (currently, the relative performance of US equities appears consistent with global PMI new orders falling back to 50); (2) the Federal Reserve is, in our view, the most hawkish central bank globally as a function of its dual mandate in a country approaching full employment, focus on core inflation (with the BoE and ECB focusing on depressed headline measures) and relatively closed economy (which limits the impact of China’s exporting of deflationary pressures); (3) in the aftermath of the first rate rise in every tightening cycle, US equities have underperformed over the following six months; (4) many of our concerns on equities globally (labour gaining pricing power, margins at peak, the level of spare capacity in the labour market, M&A at high levels, poor breadth) are somewhat US centric; and (5) finally conventional, HOLT and Shiller P/E ratios are all at the top end of their historic range versus global markets.
- What are the risks to our underweight? The US has the lowest Chinese/GEM exposure of any region and corporates cut costs quicker than elsewhere when nominal GDP disappoints. These have been very supportive attributes in 2015 but, given that we see the prospect of GEM stabilizing and global GDP picking up, could underpin US equity underperformance in 2016. The most supportive factors for US equities are fund flows, with US equity funds having experienced outflows relative to global equity funds, and the fact that the US dominates the potential of the internet plays, which remains a key theme for us.
Surely all of this is just more ammo for the Fed’s “rate hike at all costs” argument.
This article is brought to you courtesy of Tyler Durden From Zero Hedge.