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Indians have been steadily upping their exposure to US equities this year but the steep fall in the US benchmark indices in September has left experts divided on the merit of relying on one market for international diversification.
Among major world indices, the US benchmark indices have fallen the most in September. The Nasdaq Composite, which largely comprises IT and health care firms, has shed 8.3 per cent, while the S&P 500 index has fallen 5.2 per cent.
Top tech companies have fallen between 9 per cent and 17 per cent, with Apple Inc and Amazon down 17.2 per cent and 14.4 per cent, respectively.
According to experts, US equities are no longer cheap as they were in the aftermath of the global financial crisis.
Rob Arnott, partner, chairman of the Board of Research Affiliates, said he expected US stocks to deliver a nominal return of 2.5 per cent per annum (plus or minus 3 per cent) over the coming decade. US equities have delivered a 12-19 per cent compound annual growth rate over the past 11-and-a-half years.
“FANMAG-like (Facebook, Apple, Netflix, Microsoft, Amazon, and Google) stocks are in a clear bubble. Many trade at valuations as rich as the peak of the tech bubble, and require implausible future success to justify current prices. We’re also seeing an enormous surge in retail money, chasing the market darlings,” said Arnott.
A senior fund manager of a large asset management company (AMC) said: “This is a tough time to bet on US equities, given the impending elections, the polarisation in US equities, and significant run-up in the past decade.”
Changes in inflation and interest rate dynamics, he said, could play an important role in how the markets move over the coming years. Another senior fund manager from a large AMC said US equities were overvalued and he had sold his personal investments in US funds this year.
Motilal Oswal Nasdaq 100 FOF and Franklin India Feeder Franklin US Opportunities Fund have topped the charts with one-year returns of 46 per cent and 35 per cent, respectively.
A note by Axis MF, which launched a global fund of funds this month, observed that investors should look at strategies that can invest in the best ideas globally without limiting themselves to any one country, sector, or theme.
US equities, however, remain the top choice for investors and market players owing to the strength and dynamism of the local economy, capital investment, and global diversification. Structurally, the market is exposed to high-growth industries and over 50 per cent of markets earnings are derived overseas, said experts.
Financial planners like Suresh Sadagopan give priority to investing in US funds over global funds that invest in advanced economies and in emerging markets.
“US companies are truly global and at the frontline of innovation. A lot of people talk about a bubble building up in US equities, but so is the case with other major markets to varying degrees,” said Sadagopan.
Some industry observers say value can be found even among tech stocks.
“Large-cap tech trades at a premium because of its compelling revenue, cash flow and earnings fundamentals. Rolling earnings and cash flows forward just one or two years, would see multiples adjust significantly lower and as a consequence headline valuations look much more reasonable,” said Alex Tedder, chief investment officer, head of global and thematic equities, Schroders Investment Management.
Arnott’s advice to those investing in US equities as part of their diversification strategy: Avoid bubbles and fads, and seek the feared and unloved assets trading at cheap valuation levels.
