Vergote recently made “a simple calculation” on fair value of the S&P 500 and Euro Stoxx 600. According to the Belgian, the S&P 500 is currently overvalued by 10-20%, while European equities are trading on a discount of up to 50.
“This means the risk premium for Europe is huge. But the question is whether this will disappear. I think it will take a long time because there’s so much political uncertainty. Earnings growth and the PMI are on a positive trajectory, but it’s too soon to be euphoric,” he says.
US overweight, for now…
Instead, Vergote is overweight US equities for clients that can stand some risk, as the ‘Trump boost’ is driving earnings expectations higher. “But for more risk-avert client we are on a neutral stance because US equities are no longer cheap, and increasing interest rates could be a drag on performance on the longer term.”
EM equities are another asset class on his radar. “On the long term, EM fundamentals are good. But we expect a lot of volatility in the coming months. We were overweight equities and local as well as hard currency bonds, but cut back our exposure to neutral after Trump’s election.”
On the longer term, Vergote sees the most attractive opportunities in European and emerging market equities, since both asset classes are trading on a discount because of political uncertainty.
“My highest expected return is in Europe: 5-6% p.a. With good evolution in emerging markets, returns from there could even be higher. So the two markets we prefer are emerging markets and Europe.”
