three year growth phase appears close to end and monetary cycles moving in opposite directions ring warning bells for f&c
F&C has moved underweight in equities for the first time in more than three years.
Profits have been taken from emerging market and European equity positions - both areas which have been strong performers over the three year bull market.
The asset allocation team at F&C had previously raised equity positions close to the trough in the market in June, buying Japanese equities at a low point.
Paul Niven, head of asset allocation at F&C, said: "Our quantitative inputs suggest little to choose between equities and bonds over the next six months at present, but our qualitative assessment suggests an increasingly asymmetric risk/reward trade off in equity markets. We believe the rally is now largely over in the short term and risks to expectations suggest that we take money off the table."
He said three years of equity gains had been driven by improving corporate fundamentals and that now appeared close to the end. "We expect a re-emergence of growth concerns in the near term and markets appear overly bullish at present, with deteriorating dynamics," he added.
Niven adds that while equity markets have cheered the prospect of an end to rate hikes in the US, the picture elsewhere looks less clear. In Europe, data releases show a picture of improving growth are likely to keep the ECB imposing further hikes for some quarters yet.
"Over the coming months, divergent monetary policy will be an emerging theme in markets with forward-looking investors anticipating rate cuts in the US in 2007. If history is a guide, the significant underperformance of US equities against Europe should be close to an end as monetary cycles move in opposite directions.
"There are, as usual, plenty of rampant bulls and the longer-term outlook still appears favourable for equities, which are supported by attractive valuations. In the near term, however, why are the bulls wrong?
Niven said it is true that equities continue to offer good value for the long-term investor but the short term poses cyclical risks. Analogies with 1995, when US rates peaked, and markets then rallied strongly, are wrong. In that instance, earnings were rising strongly and bond yields collapsed, fuelling strong equity returns. Now, bond yields are already at low levels and will not decline materially. "Earnings have reached historically high levels. We are not yet at the point of expecting declines in earnings but pressure on margins will rise. As said at the outset, risks are becoming asymmetric - near-term downside is greater than upside potential," Niven added.
Equity positions raised in market trough in June
Improving corporate fundamentals close to an end
Longer term outlook remains sound
Despite improved risk appetite
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