Dubai: Equity investors have poured billions of dollars in European and Japanese equities so far in the year due to easy monetary policy, even as investors could take a fresh look at US stocks despite its stellar performance for six straight years.
Divergent monetary policies in the world have created opportunities for investors, with stable crude oil prices also increasing their risk appetite.
European and Japanese equity funds net inflow this year was close to of $90 billion and $50 billion respectively, so far in the year to September, data from EPFR, a global fund flow provider.
Amid all this, the equities in the US market, which has almost doubled in the past six years, witnessed an outflow due to uncertainty over interest rates.
The combined assets of the nation’s (US) mutual funds decreased by $648.78 billion (Dh2.4 trillion), or 4.0 per cent, to $15.63 trillion in August, according to the Investment Company Institute’s official survey of the mutual fund industry.
“I think the market volatility has created an outflow as people panic. However, I expect it will go straight back there when things calm down. The US is still attractive and beats chasing yields in Europe or Japan,” said Sam Instone, Chief Executive Officer of Wealth management firm, AES International based in Abu Dhabi.
Europe’s main stock market index has gained more than 12 per cent in the past year compared to 24 per cent gains in Japanese TOPIX index. The US equities lagged in its performance with just 7 per cent gains in the past year.
Outperform
UBS expects developed markets to outperform their world peers.
“This is an environment that we are still looking at developed economy markets to continue to perform relatively well, and even better than emerging markets. It’s an environment where risk assets should continue to be supported, that means it would be a growth environment, which would be helpful for risk assets.
“With the rising policy rates, risk assets would outperform bonds. We are likely to see a rise in bond yields in a year or so. Equities would be a better performing class,” Paul Donovan, Managing Director, Global Economics at UBS Investment Bank told Gulf News.
Investors can go in for risky assets as there is some degree of stability now in financial markets with stability coming back to crude oil too.
UBS is overweight on European equites, reflecting the fact that economic recovery is in an early stage, and the US economic recovery is relatively mature. Valuations are still attractive in Europe, and there is more potential positive surprises in Europe than anything else.
Favoured sectors
Based on the results of the BofA Merrill Lynch Fund Manager Survey, the sectors most favoured are information technology and consumer discretionary, while investors may avoid energy, materials and utilities.
An analyst at Julius Baer also agrees with this view.
“A stabilisation in bond yields and eventually rising yields would support cyclical sectors while weighing on defensives. Such a tendency might start sometime in the coming months. Valuation on an overall equity basis remains fair and compared to other asset classes, is still attractive,” Christoph Riniker, Head of Equity Strategy Research, Julius Baer said.
On the basis of the PE (price to earnings) ratios, the long term average PE is 15.8x and it is currently at 15.1x, suggesting that the US market is slightly undervalued, according to AES International’s Instone. Price to Earnings ratio are generally used to show expensive or cheap an equity or index is.
