So are there still reasons to increase your allocation to US equities? One might be a conviction that the dollar will continue its ascent, reaching parity with the euro and going even further than that. This is a belief which would have been thought of as ludicrous just a couple of months ago, but now it has become quite mainstream. One of these dollar bulls is Rico Bosma, a fund analyst for Wealth Management Partners in the Netherlands. However, while having a strong view about the strength of the dollar, he wanted to reduce his allocation to US equities at the same time. So in February he swapped part of his US equity exposure for European equity.
“But we didn’t want to reduce our exposure to the dollar, so we bought a dollarhedged share class of a European equity fund,” he explains. The divergence in appetite between European and US equities is also visible in recent fund flows. According to Morningstar, European equity funds took in a net €11bn in the first quarter of the year. Contrastingly, US equities witnessed net outflows of a similar scope.
Still, not everyone is negative about the asset class. George Raven, chief strategist for the private bank Insinger de Beaufort in Amsterdam, believes that US equity sentiment has gone too negative, and sees buying opportunities in the asset class. “If you correct for sector weightings, US equities are not more expensive than European stocks. They are actually cheaper,” he says. “In the US, sectors such as healthcare and technology, which typically have higher valuations, are relatively well-represented. In Europe, this is the case for cheaper sectors like utilities and banks.”
A Japanese comeback
The third developed equity market, Japanese equities, is witnessing a comeback. Appetite has been rising gradually for about a year now and buyers outnumber sellers by three to one, though the majority of Europe’s fund buyers do not plan to alter their allocation at all.
“I can understand why people want to buy Japanese equities again,” says Rico Bosma, who tends not to be invested there. “It’s now the first time in 10 years that zero exposure to Japan is hurting us”, he said, alluding to the year-to-date 13.6% rise of the Nikkei 225 index in local currency terms.
Rishma Moennasing of Rabobank belongs to the minority of investors who increased their allocation to Japanese equities in time to profit from the recent rally. “We increased our weighting about half a year ago, but use a currency hedge. This has had a positive effect in the past, but it’s different now.”
