Schroder Securities recommends buying Europe if the US market starts to fall The group estimates tha...
Schroder Securities recommends buying Europe if the US market starts to fall
The group estimates that European equities would look between 33% and 50% underrated if the US were to correct. Overall it believes US equities are 35% to 50% above fair value even on optimistic assumptions, the most extreme divergence for two decades
Schroders has argued that there is potential for a bull European market in the event the US market undergoes a 30% plus correction
UK-based investors have gro-wing expectations that a correction or bear market could take place in the US in the near fut-ure
Managers, many of whom have been underweight for several years on account of valuation fears, are now focusing on the potential harm that rising inflation expectations, rising int-erest rates and a weaker dollar could have on the equity mar-ket
Analyst forecasts are also very optimist for the American corporate sector, leaving little room for disappointment, accor-ding to Schroders. The group has highlighted a demographic shift in the North American market with the baby-boomers, who have had record levels of exposure to equities, now due to become bond buyers in the near future as they enter retirement
Paul Walton, UK and European strategist with Schroders, said: "In contrast, European equity markets are currently close to fair value and any falls would present an opportunity to buy European stocks at a discount at the start of the next bull market, which could be led by Europe
Hypothesising that the US market does crash in the near future, the group has outlined portfolio implications for UK and European investors. Walton said: "The economic impact of a sharp fall in US equity prices would have a profound impact on the US economy but it need not be all bad news
"The obvious asset allocation call is to cut equity exposure, raise first cash and then bond exposure. We would use this liquidity to overweight modestly valued European equities, from lower levels, for relative outperformance
A defensive portfolio, which would outperform during a sell-off, could be built up by buying stocks in the consumer and service businesses, bond proxies such as selected insurance or utility stocks and underrated small or mid-cap stocks, acc-ording to Schroders. The portfolio should also have exposure to UK and European domestic stocks and companies with low US institutional ownership, Walton said
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