US rule can not last longer than other regions By Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – US equity prices are outpacing those of most other regions in early 2019, but the gap is small and some investors plan to create catalysts that could tip the balance towards the rest. of the world.

According to investors, a number of factors could affect performance in favor of other developed and emerging markets, including slower US earnings growth, the weaker US dollar, improved economies in China and Europe. and the resolution of global trade tensions.

The 11% gain this year is helping the US benchmark extend its global advantage since the US stock market started ten years ago.

According to Bank of America Merrill Lynch (NYSE :), US equities have almost reached their highest level in 70 years compared to other global developed markets.

"Most of the time, the US has outperformed non-Americans," said Nathan Thooft, head of asset allocation at Manulife Asset Management in Boston. "In reality, it can not last forever."

US corporate profits are expected to grow 5.3% this year after rising 24.4% in 2018, according to Russell's Global Markets Study.

European companies, with the exception of the United Kingdom, are expected to see their profits grow by 9.1% this year, while corporate earnings in emerging markets are expected to increase by 13.9%.

In addition, the S & P 500 index trades at 16.4 times earnings estimates for the next 12 months, more expensive than the 13.4 times for the STOXX in Europe and 11.5 times for the MSCI Emerging Markets Index, according to Refinitiv data. In addition, the valuation gap of the S & P 500 relative to these indices is wider than in the past.

"People are willing to pay a very heavy premium for the US stock market," said Lance Humphrey, portfolio manager at USAA Asset Management. "We believe that US fundamentals do not necessarily justify the degree of this premium."

This valuation difference particularly attracted emerging markets, which were "the most crowded market" in a survey of fund managers by BAML last month.

The strength of the US dollar is another factor for emerging markets, many of which have debt denominated in the greenback. For US investors, a strong dollar also requires expensive currency conversion for investments in international funds.

Investors say the dollar has been surprisingly resilient this year, given the Fed's more accommodative stance, but any weakening of the US dollar could be a boon to out-of-country equities.

The resolution of the trade dispute between the United States and China could give a new impetus, as investors have become optimistic about an agreement between the two largest economies in the world.

"If China and the United States reach a good deal, it will propel emerging markets and have a bigger impact on emerging markets than on the US market," said Chris Gaffney, President of Global Markets at TIAA Bank . "All emerging markets are somewhat dependent on China, as most of them are their main trading partners."

Positive commercial resolution potential helped fuel the 22% race this year for the Chinese index, which outperformed both the US and other major world indices.

The European STOXX has climbed 10% this year. Poor economic prospects – the euro area economy is expected to grow by 1.3% this year, just over half of the US rate – as well as political uncertainty in Britain and elsewhere have put pressure on actions.

Lisa Shalett, Director of Investments at Morgan Stanley (NYSE: Wealth Management), released a report last week that said European equities should be at the top of US stocks, noting that "modest economic growth forecasts seem feasible."

"The best thing for Europe right now is that no one is expecting anything," said Keith Lerner, market strategist at SunTrust Advisory. Services in Atlanta. "It means that some good news could go a long way."

The significant weight of technology stocks in the country indices is one of the factors that drove US outperformance this year. In the United States, almost a quarter of the MSCI index is composed of technology companies, compared to 15% in the financial sector. In contrast, the MSCI index of the European Union holds 19% of finance and 6% of technology.

The tech sector and other high-growth stocks have been supportive, but some investors are expecting a transition to financials and other stocks, so that Europe could benefit from a relative recovery.

Of course, not everyone agrees. Nicholas Colas, co-founder of DataTrek Research, has doubts that financial services will be in the lead this year, which is why he prefers the S & P 500 to indices in other parts of the world.

Indeed, Willie Delwiche, investment strategist at Baird, said that geographic diversification at the expense of the US market had detracted from performance, so investors "will be a bit shy" to allocate them to the rest of the world.

As it stands, Manulife's Thooft said, "There is no question that US assets are overexploited."