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US equity rally has no solid footing

Money in balance

The index has already marked 34 record highs since surpassing its pre-crisis record of 1,552.5 points in 2013, noted Bill McQuaker, multi-asset portfolio manager at Fidelity. The index broke through the 2,500-points barrier for the first time on Friday last week, before setting another all-time high during the next trading session on Monday.

“Whether this can continue, though, is uncertain, with the market increasingly driven by tech companies like Alphabet, Amazon [Facebook] and Apple,” said McQuaker. “While the broad market has returned just over 11% this year, the S&P information technology sector has returned more than 25%.”

 

“Investors have been willing to pay up for the growth offered by technology stocks, perceiving it to be in scarce supply elsewhere. But if expectations around technology disappoint, or competition authorities look more closely at the sector, the hype could disappear quickly,” he added.

Expert Investor noticed earlier that overweighting Amazon and Facebook in your portfolios would have all but a guarantee for outperformance for a US equity fund manager this year.

US equity ETFs were a surprise best-seller with European investors in August, seeing €804m in net inflows over the month, according to Morningstar data. But it’s doubtful whether the momentum will hold. European investors have long recorded US stocks as expensive, and the asset class actually hasn’t delivered any returns for euro-based investors this year, unless they had hedged their exposure back to euros.

According to the latest Expert Investor asset allocation sentiment data, the number of fund buyers intending to decrease allocation to US equities over the next 12 months outnumber those planning to cut exposure by a factor of three.

And taking on even more broad exposure indeed isn’t a good idea, says McQuaker: “Investors who still want to allocate to the US might prefer to add to areas which have underperformed in recent months.”

“If the equity market continues to do well, or if growth surprises to the upside, then this year’s laggards, like oil equities, should have their day in the sun. But if the outlook becomes more challenging, investors will probably sell what they are overweight already, i.e. those large tech companies where growth increasingly comes at a premium.”

Part of the Bonhill Group.