Reasons to worry
Marino Valensise, head of Barings’ multi-asset team, in the firm’s latest monthly asset allocation view takes a more pessimistic view, however, pointing out that the “three pillars of the great profit margin expansions (tax expense, labour cost and interest rate cost) are ready to invert”.
While he believes that any dent in corporate profits will take years to materialise, he adds that the technical factors that have underpinned the equity bull market in the US, particularly M&A, margin debt and share buybacks are unlikely to improve from here.
“While margin debt peaked in 2014, time will tell whether current levels signal a top for M&A volumes and share buyback activity. Given the state of the credit market, this is a real possibility. If so, there will be a negative impact on the US equity market, though no direct implications for Europe and Japan,” he said.
For Valensise, a second concern is the concentration of the winner’s pool.
As he points out, the breadth of winners within the US equity market is disappointing.
“This group of stocks,” he says, “is commonly defined as the “nifty nine” (Facebook, Amazon, Netflix, Google, Priceline, eBay, Starbucks, Microsoft and Salesforce). More narrowly, these are the FANG stocks (Facebook, Amazon, Netflix, Google). These are already trading at very expensive valuations and might bite downwards, unless the rest of the equity market performs better.”
There is however, a second concern for investors, aside from valuations. Equity holdings by households, institutions, and foreigners as a percentage of their financial assets is currently almost one standard deviation above its mean, which some analysts have taken as an indication that stocks are both overvalued and overbought.
