State Street upbeat on US, Asia and emerging market stocks
An increasingly bearish outlook on European equities and cautious optimism on Australia and New Zealand are among this multi-asset team's current positions.
An increasingly bearish outlook on European equities and cautious optimism on Australia and New Zealand are among State Street's current positions.
The multi-asset manager had already been pulling back on its exposure to Italy before yesterday's developments in the country's deepening political crisis.
Investors fear that repeat elections - which now seem inevitable in the eurozone's third largest economy - may become a de facto referendum on Italian membership of the currency bloc and the country's role in the European Union.
The euro was down 0.3 per cent yesterday, while stocks in Milan slid 2.6 per cent on the main index after a 2.1 per cent fall on Monday. Bank shares slumped another 5 per cent, having lost 4 per cent in the previous session, bruised by the sell-off in government bonds, a core part of Italian banks' portfolios, according to AAP.
European Central President Mario Draghi vowed in 2012 to do whatever it takes to avoid "QuItaly".
"We had been broadly overweight euro equities as we entered the year, and have since pulled that back," Dan Farley, chief investment officer of State Street Global Advisors' investment solutions group in the US, told Morningstar.com.au.
"In Europe more broadly, the valuation story looks kind of interesting … but the expected growth rate and recovery in Europe has not been as strong as what we would say is needed to start to drive earnings and to see that valuation discount realised," Farley said.
He added that the United Kingdom's prolonged exit from the EU continued to create "a lot of uncertainty in terms of what exactly Brexit will look like … a bit of an overhang on expectations there, and investors are seeing price points are not great. It's difficult to have a good view on corporate growth until some of these rules are in place".
More attractive markets
Overall, Farley remains upbeat on equities and continues to hold an overweight position to markets. "When we look at the economic backdrop, which is positive but not overly strong, we look at rates around the world and some parts are rising, but still relatively low."
"So, we're overweight equities across our tactical portfolios, and that is largely positioned by US equities, Asia Pacific regional equities, and emerging markets … and each of those has different drivers," he said.
Farley said State Street's rationale for maintaining a strong US exposure was backed up by "a growth backdrop story, and less about valuation, while in emerging markets, it's valuation and growth".
"In areas like Japan, it's a bit more valuation and the uptick in growth – all of those have led us to be overweight stocks and underweight fixed income across the board," Farley said.
Australia and New Zealand
Cautious optimism is perhaps the best way to describe State Street's approach to local markets in Australasia. "We see Australia and New Zealand [collectively] as being a nice beneficiary of the Asian story, given the connectivity with that region and the business ties there.
"But there are areas that we want to be mindful of, such as if there were a slowdown in China, how that would impact the local economy here, and clearly you've got elevated property prices. All those things mean that Australia needs to deliver, and so we're mindful of those risks, but it's not something we're shying away from."
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Glenn Freeman is senior editor at Morningstar Australia.
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