Head - Equity Strategy
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High confidence levels in US markets are likely to limit future returns
The contrast could hardly be sharper. As emerging equity markets languish, the US remains close to all-time highs. Robust domestic fundamentals are part of the story here. US consumer confidence is at its highest levels since the heady days of the dot.com boom of 2000. Labor demand, industrial output, and manufacturing orders are also in all good shape. But amongst all this positive news, we see several reasons why investors should be cautious.
Trade is perhaps the obvious issue confronting the US economy. The latest US tariffs imposed upon Chinese imports have immediately triggered retaliation. At the same time, US monetary policy is tightening. Average hourly earnings have been rising strongly, hitting their highest level this cycle. This argues for further Federal Reserve interest rate hikes to come. The Markit Purchasing Managers Index, meanwhile, points to slowing US growth in the next six months.
On the political front, US mid-term elections are just a few weeks away. Opinion polls suggest a greater-than-three-quarters chance of the Democrats wresting the House of Representatives from the Republicans. If such a divided federal government emerges, we believe it would prevent further economically impactful reforms from being passed. This would be unhelpful for US equities.
Put simply, we see today’s high level of investor confidence in US markets as likely to limit future returns. As the accompanying chart shows, the time to buy US equities is when the US ISM manufacturing index is at low levels, rather than at today’s highs. We continue to believe than non-US equity markets look more attractive. Aside from their lower valuations, we believe that they stand to benefit more from an easing of international trade tensions.
Clients can read our full thoughts on the US and global markets in September’s edition of Global Equity Strategy.