By Naomi Rovnick
LONDON (Reuters) – Global investors are turning to European and emerging market assets to protect themselves from further turmoil in U.S. stocks and bonds, as stubborn inflation forces review of bets on the timing of rate cuts of interest from the Federal Reserve.
April was a disaster on Wall Street, with the S&P 500 stock index and U.S. Treasuries posting their biggest monthly loss since September.
Fund managers are now looking for ways to limit losses if the trend does not reverse.
That could involve restructuring portfolios that have been carried for years by highly valued U.S. stocks, said Sonja Laud, CIO at Legal & General Investment Management, which manages about $1.5 trillion.
“Diversification will be much more important in the future,” she said, adding that LGIM did not expect higher returns from global stocks but now preferred European stocks over those from the United States.
Amélie Derambure, senior multi-asset manager at Amundi, Europe’s largest asset manager, said she still expected long-term gains in U.S. stocks but had been buying puts to protect against a 10% decline. It had also transferred part of the liquidity from Treasury bills to 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 stock index since 2020 in dollar terms, according to calculations by Pictet Asset Management.
The Magnificent Seven group of technology stocks, boosted by the artificial intelligence boom, contributed more than 60% of the S&P’s total return last year.
But while persistent inflation raises hopes that the Fed will keep U.S. borrowing costs at a 23-year high of between 5.25% and 5.5%, or even raise them again, the cost of betting on gains at long term from massive big tech investments in AI rather than holding cash is on the rise.
A sharp fall in shares of Facebook owner Meta in April highlighted the risks of hoping for bumper tech profits in an environment where rates remain high. Until recently, markets expected the Fed to begin cutting rates in June.
The S&P remains highly valued, with a price/earnings multiple almost 7 percentage points higher than the European Stoxx 600, according to LSEG data.
Investors said the Stoxx was attractive because it brought together companies in so-called value sectors, such as banking and energy, which benefit from stable global growth but tend not to suffer when costs borrowing increases.
“We are increasing our exposure to Europe,” said Luca Paolini, chief strategist at Pictet Asset Management. “The general macroeconomic outlook favors a cyclical and cheap value market.”
European fund manager Carmignac reduced some technology positions in the United States in April and was looking for opportunities closer to home, said Frédéric Leroux, the group’s head of multi-asset assets.
“Diversification towards Europe makes perfect sense today,” he said. “Every time you have a new wave of inflation (in the United States), you will see a clear outperformance of Europe.”
Moderating inflation in the euro zone means the European Central Bank is expected to start cutting interest rates on June 6.
Ross Yarrow, managing director of U.S. equities at investment bank Baird, said global investors were mostly negative on U.S. stocks for valuation reasons.
But superior revenue growth has also helped Wall Street outpace Europe in 12 of the past 16 years, he said.
TREASURE BEAR
The Treasury index fell about 2% in April, its worst month since September.
Amundi’s Derambure said it still expected cuts from the Fed, but had increased its euro zone government bonds in recent weeks to wait “for the end of the collapse of U.S. fixed income securities.
Traders expect US rates to fall by 35 basis points this year, but by 65 basis points in the euro zone, where inflation has moved closer to the ECB’s 2% target.
Treasurys may not recover even if the Fed cuts rates, according to Barclays strategists, due to high and growing U.S. government debt.
Emerging market bonds are attracting buyers, however, as investors hope to see robust economic growth in countries like India, Indonesia and Vietnam.
LGIM’s Laud added that she was positive about Indian bonds, which have been snapped up by foreign investors ahead of their inclusion in a major debt index later this year and as the economy booms. growth.
“In fixed income, we see the best opportunities from a risk perspective (of) emerging market dollar debt,” said Nathan Thooft, chief investment officer for Manulife’s multi-asset solutions.
TANGLED
Diversifying from U.S. assets could prove difficult.
The Stoxx tends to follow 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 U.S. 10-year yields typically causing global yields to rise by 56 basis points, according to a Barclays study.
“It’s always very difficult to say: OK, I want to be lighter on the United States and invest more in other parts of the world,” Leroux de Carmignac said.
“But even with correlations, there are times when you can find outperformance elsewhere.”
(Editing by Dhara Ranasinghe and Catherine Evans)
