Experts from Schroders, Robeco, and Franklin Templeton advise maintaining a cautious stance on the valuation of US equities, highlighting that key interest rates are likely to decrease more slowly than market expectations.
Annually, Schroders, Franklin Templeton, and Robeco host their Investment Forum in Brussels. At this event, specialists from these three asset management firms shared their projections for the newly commenced financial year and offered insights on strategic portfolio positioning.
New opportunities
In the realm of equity markets, Alex Tedder, head of global and thematic equities at Schroders, predicts sustained strong performance from the ‘Magnificent Seven’ in upcoming quarters. “Their premium is warranted by robust fundamentals and growth potential. Nevertheless, I don’t foresee them outpacing the broader market again,” he noted.
In light of the prevailing interest rate scenario, Tedder anticipates a shift in market leadership. He foresees markets with more compelling value propositions, like the UK and Japan, gradually surpassing others. Additionally, he expects small and mid-cap stocks to outperform, considering their historical discount relative to large caps.
Tedder also envisions a rebalancing between growth and value stocks but cautions that value stocks are often inexpensive for valid reasons, such as technological disruptions impacting market profitability. He advises favoring stocks that exhibit strong growth at a reasonable price.
A real alternative
Addressing the bond market, William Vaughan, associate portfolio manager & senior research analyst at Brandywine Global-Franklin Templeton, underscores the uncertainty surrounding monetary policy relaxation in the coming months. “We believe Jerome Powell will exercise caution, waiting for inflation to reduce to 2% before altering the key rate,” he said.
Vaughan also observes a notable economic divergence between Europe and the US, with parallel expectations for rate easing. “This disparity is unsustainable, leading us to decrease our duration in the US market and increase it in Europe,” he said. He also highlights the substantial volume of US Treasury bond issuances in 2024, potentially exerting pressure on the US 10-year rate.
Better balance
Arnout van Rijn, portfolio manager at Robeco, echoes this cautious sentiment. He notes that workers are in a stronger position to negotiate higher wages, potentially impacting earnings growth. Van Rijn expresses caution towards equities, particularly US stocks, anticipating an adjustment in earnings expectations in the months ahead.
“Compared to last year, we can now achieve higher returns with lower risk, as fixed income presents a viable alternative to equities,” he said. In the short term, Van Rijn favors short-maturity sovereign market investments and anticipates more appealing entry points in the credit market when spreads widen by 200 to 300 basis points later in the year, amidst a less favorable economic climate. “Reducing inflation from 3% to 2% will be challenging given the current labor market conditions, so we don’t foresee significant cuts in key rates in the near future,” he concluded.