Investors should be looking away from the US for their equity exposure, according to BlackRock’s Russ Koesterich.
The firm’s global chief investment strategist said Japan, Europe and even emerging markets offered higher potential returns than the US.
Mr Koesterich’s intervention comes in spite of the US underperforming most other major markets so far in 2015, as companies have been weighed down by the strong dollar and slowing economic growth.
One factor behind his comments is the divergence in monetary policy, with the US gearing up to raise interest rates while the eurozone and Japanese central banks continue to pump quantitative easing (QE) into their systems.
Mr Koesterich said: “An autumn rate hike by the Fed (US Federal Reserve) and the resultant modestly higher rates are unlikely to be a catastrophe for markets. Still, liftoff by the Fed would mean that the safety blanket of ultra-accommodative monetary policy starts to be removed. And as the market demonstrated in the spring of 2013, investors’ reaction to losing their safety blanket is roughly the same as most toddlers. A tantrum may, at least temporarily, ensue.”
Away from the US, QE has already led to rallies in Europe and Japan. Mr Koesterich said that should continue for the foreseeable future.
The Japanese Topix index has risen by 19.7 per cent so far this year, while the German Dax 30 index is just behind.
Emerging markets as a group have not enjoyed such a strong rally, although individual markets, notably China, have risen substantially. Mr Koesterich said emerging markets would be a better option than US equities, especially as fund flow data indicates more investors are starting to return to the region.
A fund manager survey from Bank of America Merrill Lynch found the net percentage of global investors with an underweight position towards emerging market equities fell from 18 per cent to 6 per cent in May.
At the same time, investors have been abandoning US equities, with the percentage of investors now with an underweight position at its highest level since January 2008.
Europe and Japan are by far the most popular regions for global investors at the moment, according to the survey, with a net 46 per cent of respondents with an overweight to Europe and 42 per cent to Japan.
Mr Koesterich said there were still concerns, such as Greece potentially leaving the eurozone and the speculative buying of Chinese stocks, but “lower valuations and monetary accommodation suggest investors should consider raising their allocation to non-US equities”.