Investors scour the globe for shelter as Wall Street shakes
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[May 01, 2024] By
Naomi Rovnick
LONDON (Reuters) - Global investors are eyeing European and emerging
market assets to protect themselves from further turbulence in U.S.
stocks and bonds as stubborn inflation causes bets on the timing of
Federal Reserve interest rate cuts to be revised.
April was a washout on Wall Street, with the S&P 500 share index and
U.S. Treasuries posting their biggest monthly loss since September.
Money managers are now looking for ways to limit losses if the trend
does not reverse.
That could entail the restructuring of portfolios that had been lifted
for years by richly-valued U.S. equities, said Sonja Laud, CIO at Legal
& General Investment Management, which manages roughly $1.5 trillion.
"Diversification will be a lot more important going forward," she said,
adding that LGIM was not expecting superior returns from global stocks
but now preferred European shares to those from the United States.
Amelie Derambure, senior multi-asset manager at Amundi, Europe's biggest
asset manager, said she still expected long-term gains from U.S. stocks
but had bought put options to protect against a 10% fall. She had also
switched some cash out of Treasuries into euro zone bonds.
The S&P 500 fell 4.2% in April.
ENTER EUROPE
U.S. stocks have provided about 80% of the price return of the MSCI
World share index since 2020 in dollar terms, Pictet Asset Management
calculates
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The "Magnificent Seven" group of tech stocks, supercharged by an
artificial intelligence boom, contributed over 60% of the S&P's total
return last year.
But as sticky inflation drives expectations that the Fed will hold U.S.
borrowing costs at a 23-year high of 5.25%-5.5% or even hike again, the
cost of betting on long-term gains from big tech's hefty AI investments
versus holding cash is rising.
A sharp fall in Facebook owner Meta's shares in April highlighted the
risks of hoping for stellar tech earnings in an environment where rates
stay high. Until recently, markets had expected the Fed to start cutting
in June.
The S&P remains highly valued, with a price-to-earnings multiple almost
7 percentage points above Europe's Stoxx 600, LSEG data shows.
Investors said the Stoxx appealed because it is stacked with companies
in so-called value sectors such as banking and energy which benefit from
steady global growth but tend not to suffer when borrowing costs rise.
"We are increasing exposure to Europe," said Luca Paolini, chief
strategist at Pictet Asset Management. "The general macro outlook is
supportive for a cheap, cyclical value market."
European fund manager Carmignac reduced some U.S. tech holdings in April
and was seeking opportunities closer to home, the group's head of
cross-asset Frederic Leroux said.
"Diversifying towards Europe today makes a lot of sense," he said. "Each
time you have a new wave of (U.S.) inflation you will see a big
outperformance for Europe."
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A man walks past various currency signs outside a brokerage in Tokyo
October 28, 2014. REUTERS/Yuya Shino/File Photo
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Moderating euro zone inflation means the European Central Bank is
expected to start cutting interest rates on June 6.
Ross Yarrow, managing director for U.S. equities at investment bank
Baird, said global investors were mostly negative on towards U.S.
stocks on valuation grounds.
But superior revenue growth also helped Wall Street outpace Europe
in 12 of the past 16 years, he said.
TREASURY BEARS
An index of Treasury bonds, dropped around 2% in April, its worst
month since September.
Amundi's Derambure said she still expected Fed cuts but had topped
up on euro zone government bonds in recent weeks to wait "for this
washout in U.S. fixed income to be over".
Traders expect 35 bps of U.S. rate cuts this year but 65 bps in the
euro zone, where inflation has dropped closer to the ECB's 2%
target.
According to Barclays strategists, Treasuries may not rally even
when the Fed does cut because of high and rising U.S. government
debt.
Emerging market bonds are picking up buyers, however, as investors
hope to see robust economic growth in the likes of India, Indonesia
and Vietnam.
LGIM's Laud added that she was positive on Indian bonds, which have
been snapped up by foreign investors ahead of inclusion in a major
debt index later this year and as the economy booms.
"Within fixed income we see the best opportunities from a risk
perspective (from) dollar-based emerging market debt," Manulife's
chief investment officer for multi-asset solutions Nathan Thooft
said.
TANGLED
Diversifying from U.S. assets could be tough.
The Stoxx tends to track the S&P, with an 88% correlation between
the two markets since 1986, Baird's Yarrow calculates.
Treasuries also strongly influence other debt markets, with a 1
percentage point rise in 10-year U.S. yields commonly pulling global
yields 56 basis points higher, a Barclays study found.
"It is always very difficult to say, OK I want to be lighter on the
U.S. and investing more in other parts of the world," said
Carmignac's Leroux.
"But even with correlations, you have moments where you can find
outperformance somewhere else."
(Editing by Dhara Ranasinghe and Catherine Evans)
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