By Naomi Rovnick
LONDON- Global investors are eyeing European and emerging market assets to protect themselves from further turbulence in US stocks and bonds as stubborn inflation causes bets on the timing of Federal Reserve interest rate cuts to be revised.
April was a washout on Wall Street, with the S&P 500 share index and US Treasuries posting their biggest monthly loss since September.
Money managers are now looking for ways to limit losses if the trend does not reverse.
That could entail the restructuring of portfolios that had been lifted for years by richly-valued US equities, said Sonja Laud, CIO at Legal & General Investment Management, which manages roughly $1.5 trillion.
“Diversification will be a lot more important going forward,” she said, adding that LGIM was not expecting superior returns from global stocks but now preferred European shares to those from the United States.
Amelie Derambure, senior multi-asset manager at Amundi, Europe’s biggest asset manager, said she still expected long-term gains from US stocks but had bought put options to protect against a 10 percent fall. She had also switched some cash out of Treasuries into euro zone bonds.
The S&P 500 fell 4.2 percent in April.
US stocks have provided about 80 percent of the price return of the MSCI World share index since 2020 in dollar terms, Pictet Asset Management calculates
The “Magnificent Seven” group of tech stocks, supercharged by an artificial intelligence boom, contributed over 60 percent of the S&P’s total return last year.
But as sticky inflation drives expectations that the Fed will hold US borrowing costs at a 23-year high of 5.25 percent -5.5 percent or even hike again, the cost of betting on long-term gains from big tech’s hefty AI investments versus holding cash is rising.
A sharp fall in Facebook owner Meta’s shares in April highlighted the risks of hoping for stellar tech earnings in an environment where rates stay high. Until recently, markets had expected the Fed to start cutting in June.
The S&P remains highly valued, with a price-to-earnings multiple almost 7 percentage points above Europe’s Stoxx 600 LSEG data shows.
Investors said the Stoxx appealed because it is stacked with companies in so-called value sectors such as banking and energy which benefit from steady global growth but tend not to suffer when borrowing costs rise.
