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London — Global investors are eyeing European and emerging market assets to protect themselves from further turbulence in US stocks and bonds as stubborn inflation causes bets on the timing of Federal Reserve (Fed) interest rate cuts to be revised.

April was a washout on Wall Street, with the S&P 500 share index and US treasuries posting their biggest monthly loss since September.

Money managers are now looking for ways to limit losses if the trend does not reverse.

That could entail the restructuring of portfolios that had been lifted for years by richly valued US equities, said Sonja Laud, CIO at Legal & General Investment Management (LGIM), which manages roughly $1.5-trillion.

“Diversification will be a lot more important going forward,” she said, adding that LGIM was not expecting superior returns from global stocks but now preferred European shares to those from the US.

Amelie Derambure, senior multi-asset manager at Amundi, Europe’s biggest asset manager, said she still expected long-term gains from US stocks but had bought put options to protect against a 10% fall. She had also switched some cash out of treasuries into eurozone bonds.

The S&P 500 fell 4.2% in April.

Enter Europe

US stocks have provided about 80% of the price return of the MSCI World share index since 2020 in dollar terms, Pictet Asset Management calculates.

The “Magnificent Seven” group of tech stocks, supercharged by an artificial intelligence (AI) boom, contributed over 60% of the S&P’s total return in 2023.

But as sticky inflation drives expectations that the Fed will hold US borrowing costs at a 23-year high of 5.25%-5.5% or even hike again, the cost of betting on long-term gains from big tech’s hefty AI investments vs holding cash is rising.

A sharp fall in Facebook owner Meta’s shares in April highlighted the risks of hoping for stellar tech earnings in an environment where rates stay high. Until recently, markets had expected the Fed to start cutting in June.

The S&P remains highly valued, with a price-to-earnings multiple almost 7 percentage points above Europe’s Stoxx 600, LSEG data shows.

Investors said the Stoxx appealed because it is stacked with companies in “value sectors” such as banking and energy which benefit from steady global growth but tend not to suffer when borrowing costs rise.

“We are increasing exposure to Europe,” said Luca Paolini, chief strategist at Pictet Asset Management. “The general macro outlook is supportive for a cheap, cyclical-value market.”

European fund manager Carmignac reduced some US tech holdings in April and was seeking opportunities closer to home, the group’s head of cross-assets, Frederic Leroux, said.

“Diversifying towards Europe today makes a lot of sense,” he said. “Each time you have a new wave of (US) inflation you will see a big outperformance for Europe.”

Moderating eurozone inflation means the European Central Bank (ECB) is expected to start cutting interest rates on June 6.

Ross Yarrow, MD for US equities at investment bank Baird, said global investors were mostly negative on towards US stocks on valuation grounds.

But superior revenue growth also helped Wall Street outpace Europe in 12 of the past 16 years, he said.

An index of treasury bonds, dropped about 2% in April, its worst month since September.

Amundi’s Derambure said she still expected Fed cuts but had topped up on eurozone government bonds in recent weeks to wait “for this washout in US fixed income to be over”.

Traders expect 35 basis points (bps) of US rate cuts in 2024 but 65bps in the eurozone, where inflation has dropped closer to the ECB’s 2% target.

According to Barclays strategists, treasuries may not rally even when the Fed does cut because of high and rising US government debt.

Emerging market bonds are picking up buyers, however, as investors hope to see robust economic growth in the likes of India, Indonesia and Vietnam.

LGIM’s Laud added that she was positive on Indian bonds, which have been snapped up by foreign investors ahead of inclusion in a major debt index later this year and as the economy booms.

“Within fixed income we see the best opportunities from a risk perspective (from) dollar-based emerging market debt,” Manulife’s chief investment officer for multi-asset solutions Nathan Thooft said.


Diversifying from US assets could be tough.

The Stoxx tends to track the S&P, with an 88% correlation between the two markets since 1986, Baird’s Yarrow calculates.

Treasuries also strongly influence other debt markets, with a 1 percentage point rise in 10-year US yields commonly pulling global yields 56bps higher, a Barclays study found.

“It is always very difficult to say, OK I want to be lighter on the US and investing more in other parts of the world,” said Carmignac’s Leroux.

“But even with correlations, you have moments where you can find outperformance somewhere else.”


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