By Lewis Krauskopf
NEW YORK (Reuters) – US stock prices exceed those in most other regions to start 2019, but the gap is narrow and Some investors look at potential catalysts to tip the scales to the rest of the world.
Investors say several factors can weaken performance in favor of other developed or emerging markets, including lowering US profit growth, a weaker US dollar, improving economies in China and Europe, and disrupting global trade tensions.
US stocks are close to 70 years high compared to other global developed markets, according to Bank of America Merrill Lynch (NYSE :).
"For the most part, there has been a fairly consistent trend that the United States does not surpass the United States," said Nathan Thooft, Manulife Asset Management CEO in Boston. "The reality is, but it can't continue forever."
U.S. Business revenue is expected to grow by 5.3 percent this year, having increased 24.4 percent in 2018, according to Russell's global market survey.
European companies, with the exception of the UK, are expected to see results increase by 9.1 percent this year, while earnings for emerging market companies are expected to increase by 13.9 percent.
Furthermore, S & P 500 trades 16.4 times for earnings estimates for the next 12 months, more expensive than 13.4 times for Europe's STOXX and 11.5 times for the MSCI Emerging Markets Index, according to refinitive data. Furthermore, the S & P 500's valuation difference over these indices is greater than the history.
"People are willing to pay a very high premium for the US stock market," said Lance Humphrey, portfolio manager with USAA Asset Management. "It is our opinion that fundamentals in the United States do not necessarily justify the degree of this premium."
This valuation difference has been an attraction especially for emerging markets, which was the "most crowded trade" in a BAML fund management survey last month.
The strength of US dollars is another factor for emerging markets, many of which have debts in dollars. For US investors, a strong dollar also requires an expensive currency conversion for investments in international funds.
Investors say the dollar has been surprisingly good this year, given the worse position of the Federal Reserve, but some US currency depreciation may be a boon to non-US equities.
Dissolution of the trade conflict between the United States and China can boost, as investors have become optimistic about an agreement between the world's two largest economies.
"If China and the United States can reach a good deal, which will actually drive emerging markets and have more impact on emerging markets than on the US market," says Chris Gaffney, president of world markets in TIAA Bank. "All emerging markets are something dependent on China because it is their biggest trading partner for the most part. "The potential for a positive trade resolution has helped fuel 22 percent this year for China's index, which has surpassed both US and other major world indices.
Europe's STOXX has climbed 10 percent this year. A weak economic outlook – the eurozone economy is expected to expand 1.3 percent this year, just over half of US rates – along with political uncertainty in the UK and elsewhere has pushed stocks.
Lisa Shalett, Chief Investment Officer at Morgan Stanley (NYSE 🙂 , last year released a report stating that European stocks should have top US stocks and notes that "modest economic growth forecasts seem to be gaining."
"The best thing for Europe right now is no one has expectations, says Keith Lerner, Marketing Director at SunTrust Advisory Services in Atlanta. "That means there is a small portion of good news can go a long way."
A factor that drives the US top this year is heavily the weight of technology stocks in the country's indexes. Almost a quarter of MSCI's US index is technology companies, compared to 15 percent in finance. In contrast, MSCI's EU index has a 19 per cent weight in finance ls and 6 per cent in tech.
Technical and other high-growth stocks have been beneficial, but some investors expect a shift towards economy and other values, so that Europe can see a relative increase.
Of course, not everyone agrees. Nicholas Colas, co-founder of DataTrek Research, doubts that economics will lead this year, which is one reason why he prefers S&P 500 over the indices of other global regions.
In fact, investment director Willie Delwiche at Baird says geographic diversification away from the US market has damaged returns so investors are going to be a little gunshot to distribute to the rest of the world.
As it says, Manulife's Thooft said "there is no doubt that US assets are over-owned."