Domestic stocks—now in their ninth year of a bull market—appear to be losing their luster with investment managers. Instead, it seems to be the turn of developed market non-US stocks and emerging market equities to shine. A record net 84% of survey respondents said in June that the US is the most overvalued region for equities, compared to a net 82% last month, according to a Pensions & Investments news report which cited Bank of America Merrill Lynch’s monthly fund manager survey. At the same time, net 18% and 48%, respectively, said European equities and emerging markets equities are undervalued. The results of the survey of 210 money managers representing $596 billion in assets under management were released June 13.
This is not news to us at NEPC. We continue to recommend an overweight position to non-US developed market equities as economic gains drive up corporate earnings; the Eurozone has posted 14 consecutive quarters of growth. Importantly, implementation remains critical and we favor active small-cap equity and broad global equity strategies. Japan, too, looks appealing because of the continuing re-haul of its corporate governance structure. In addition, we believe emerging market assets are still compelling, given the pace of economic growth in these regions, with equities offering below average valuations and local-currency debt carrying attractive total returns.
We have been encouraging investors to trim gains from domestic equities and deploy the funds towards opportunities outside the United States. To be sure, US stocks can continue their rally as global growth conditions improve but recent gains have come mostly from multiple expansion not earnings growth. As such, we advise investors to take a disciplined approach in rebalancing their portfolios and reduce exposure to assets that have outperformed expectations over a prolonged period.