InvestmentsMar 29 2016

Analysts urge caution on US equities

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Analysts urge caution on US equities

Analysts have urged caution on US equity investments as predictions for growth and corporate revenue continue to be revised down for the country.

US growth was revised down by close to a full percentage point. Investors have been told it will be “lower for longer” with several reasons to be wary of the US market.

In a research note from Societe Generale Cross Asset Research, head of strategy Alain Bokobza suggested investors go “heavily underweight” on US equities in favour of European stocks, with sterling hedged.

Of seven investment calls made by the analyst, Mr Bokobza said US growth would be “lower for longer”.

He said: “We expect the Fed’s interest rates guidance to be gradual. This will be a strong headwind for those expecting the US dollar to rise.”

However, he added: “Delayed fears of a US recession allow for more risk-taking by switching out of the most defensive assets.”

Negative sentiment on US stocks was mirrored in a note from Capital Economics. John Higgins, chief markets economist, has revised his view that higher valuations were justified by a decline in investors’ required return on equity.

The company recently revised its forecast for the S&P 500 up slightly as it expects the index to recoup some of its value lost thus far in 2016, but cautions it is unlikely the index will regain much strength due to the “advanced stage” of the US business cycle.

While the firm is still not fully bearish on the nation’s economy, the positivity once expressed has been curtailed.

Mr Higgins said the continuing falling unemployment, if not met with a rise in productivity, would create a drag on the economy. This would occur when wage inflation rises, meaning labour costs increase quicker than productivity. He added he expects such an outcome in the near term as the unemployment rate falls further from its current level of 4.9 per cent.

“Labour’s share has already begun to rise as wage inflation has picked up. Rising unit labour costs would put pressure on the Fed to tighten policy by more than the average investor is currently expecting, potentially weighing further on the stock market,” Mr Higgins said.

He added another result of labour’s share of income increasing could be a decrease of that flowing to the owners of capital, including corporate earnings, causing earnings growth to be slower than output.