‘No value left in catch-up trades’ after equities surge

‘No value left in catch-up trades’ after equities surge

Investors are facing a “challenging” environment for equity allocations after the “catch-up” trades in Japan, China and Europe left most global markets looking expensive, according to experts.

European and Japanese equity markets have been among the best performers in 2015, having lagged global indices in 2014.

Meanwhile, the Chinese stockmarket has seen a frenzy of buying in the past 12 months after lagging for several years.

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So far in 2015, the Euro Stoxx 50 index is up by nearly 20 per cent in euro terms and the Nikkei 225 index has risen by 14 per cent in yen terms. Meanwhile the S&P 500 index is only up by 2.6 per cent.

Tom Becket, chief investment officer at discretionary manager Psigma Investment Management, said the “catch-up” trades, such as Europe, Japan and selected Asian markets, had “caught up impressively” so far this year.

He warned the attraction from a relative valuation point of view had diminished and left “most global markets” looking “expensive”.

Psigma had moved money into all three markets in 2014 at the expense of the US, a call Mr Becket acknowledged was too early, but which has proved successful in 2015 so far.

But he said given the rally so far this year, the relative value argument had become more difficult and investors had now entered a tricky period, with most major equity markets looking at least fair value, if not expensive.

He said: “The outlook is much more challenging now, so you will need strong earnings growth to justify the valuations.”

Mr Becket predicted there would be “zero earnings growth” in the US this year, but said investors could still see some from Europe and Japan, which is why he had been adding money to the latter in Psigma’s discretionary portfolios.

Ben Willis, head of research at Whitechurch Securities, said markets such as Japan and Europe had been attracting investors both through the impact of quantitative easing (QE) and through their low relative valuation compared to other markets.

But he said: “Having just embarked on the quantitative easing trip, you could argue that the short-term money has been made.”

Mr Willis said the re-emergence of concerns over Greece added weight to the idea that the European rally could stutter, with investors increasingly becoming worried Greece would not be able to pay back its loans to the International Monetary Fund (IMF), possibly leading to a default and an exit from the eurozone.

However, Jim Wood-Smith, head of research at discretionary manager Hawksmoor Investment Management, said investors should not make relative valuation calls to play “catch-up” trades, because “relative valuation calls tend to be very short term and end in tears”.

He said markets were “entirely” in thrall to quantitative easing, which explained why Europe and Japan had rallied.

And he warned that when markets become bearish “they’ll all go together, and there will be no solace in owning one that was on a slightly cheaper rating than something else”.