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AMP’s Naeimi Cuts Stocks for First Time Since 2011 for Cash

“The risk-return reward is no longer as good as it used to be,” said Nader Naeimi, head of dynamic asset allocation at AMP Capital Investors Ltd. “I don’t see much valuation buffer -- it’s not as cheap as it was a year ago,” he said, citing a declining gap between bond yields and the earnings yield on stocks, from 4 percent in late 2012 to 1.9 percent now. Source: AMP Capital Investors Ltd. via Bloomberg
“The risk-return reward is no longer as good as it used to be,” said Nader Naeimi, head of dynamic asset allocation at AMP Capital Investors Ltd. “I don’t see much valuation buffer -- it’s not as cheap as it was a year ago,” he said, citing a declining gap between bond yields and the earnings yield on stocks, from 4 percent in late 2012 to 1.9 percent now. Source: AMP Capital Investors Ltd. via Bloomberg

Aug. 26 (Bloomberg) -- AMP Capital Investors Ltd.’s Nader Naeimi is reducing equity holdings for the first time since 2011 as he sees the paring of Federal Reserve stimulus driving a 10 percent slump in U.S. stocks by year-end.

Shares have risen too far, too fast as the Fed prepares to cut the $85 billion in monthly asset purchases that helped the Standard & Poor’s 500 Index reach an all-time high this month, Naeimi, head of dynamic asset allocation for the unit of Australia’s biggest asset manager, said by phone last week. Uncertainty ahead of German elections next month and about who will replace Fed Chairman Ben S. Bernanke will also drag on global equities, he said.

“Cash is the safest place right now,” Naeimi said. “We’re expecting a pullback much bigger than pullbacks we have experienced so far since 2012.”

The U.S. central bank’s plan to reduce record stimulus is whipsawing stocks, bonds and commodities. The S&P 500, which has gained 17 percent this year, is likely to sink at least 10 percent by Dec. 31, said Naeimi, who correctly predicted an 18 percent correction in Japan’s Topix index that began in May.

AMP’s Dynamic Asset Allocation Fund, which manages money for institutional clients, has reduced shares in favor of cash, he said. The allocation changes affect more than A$50 billion ($45 billion) of AMP’s diversified funds, Naeimi said.

The funds now hold less Australian and emerging-market equities than the benchmarks they track, while owning more Japanese and European shares, according to Naeimi. He’s neutral on U.S. stocks and has cut high-yield bond holdings to zero.

Paring Stimulus

The S&P 500 rose 0.4 percent on Aug. 23, posting its first two-day rally in three weeks, as investors watched for signals from Fed officials after data showed home sales plunged. Three Fed regional bank presidents, speaking from a conference in Jackson Hole, Wyoming, differed over the timing for reducing bond buying.

Atlanta Fed President Dennis Lockhart reiterated his support for tapering the bond-buying program, while James Bullard, head of the St. Louis Fed, said he was cautious of slowing purchases in September. San Francisco Fed President John Williams said should data continue “as we’ve seen,” then the Fed should taper later this year.

Gold, Bonds

Gold has declined about 17 percent this year. Benchmark 10-year Treasury yields touched 2.93 percent on Aug. 22, the highest level since July 2011, while the S&P 500 has slipped 2.7 percent since reaching a record high on Aug. 2.

“The transition from liquidity-driven strength to fundamental-driven gains is often marked by increased volatility and price weakness,” Naeimi said. Shares may advance on good data once the transition period is over, he said.

The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Investors see a 61 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg from futures show.

On April 14, 2009, Naeimi said the bear market that started in 2007 for global stocks had ended and forecast the start of a bull market amid improving economic indicators and company earnings outlooks. The MSCI World Index of 24 developed markets advanced 36 percent from then through the end of the year.

Uncertain Markets

Naeimi pared equity investments in early 2011 before the European debt crisis began roiling markets, he said. He started adding to holdings at the end of that year after investor sentiments moved to pessimistic extremes and increased his allocation every time equities slipped until June. This time is different.

“The risk-return reward is no longer as good as it used to be,” Naeimi said. “I don’t see much valuation buffer -- it’s not as cheap as it was a year ago,” he said, citing a declining gap between bond yields and the earnings yield on stocks, from 4 percent in late 2012 to 1.9 percent now.

The S&P 500 traded at 15.5 times estimated earnings on Aug. 2, the highest since April 2010.

“Markets are not ready for a less-than-favorable outcome,” Naeimi said, citing uncertainty about the new Fed chairman and the German elections as potential triggers for further declines.

President Barack Obama said he’ll make a decision “in the fall” on a replacement for Bernanke, 59, whose term expires on Jan. 31. During a White House news conference on Aug. 9, Obama said he was weighing a “range of outstanding candidates” to lead the central bank, including Fed Vice Chairman Janet Yellen and Lawrence Summers, a former Treasury Secretary and a White House economic adviser.

Election Approaches

It’s “dangerous” to assume German Chancellor Angela Merkel will win a third term, finance minister Wolfgang Schaeuble said Aug. 20. Merkel’s coalition is leading in polls before Europe’s biggest economy holds a vote on Sept. 22.

Among global stocks, the market about which Naeimi is most bullish is Japan. The Topix gained 33 percent this year through Aug. 23, the most among developed markets tracked by Bloomberg, as the nation’s currency weakened about 12 percent amid efforts by the government and central bank to end decades of deflation.

“I believe Japan will be an outperformer during the correction, given Japan’s aggressive policy support and the potential for a weaker yen,” Naeimi said. “Out of any correction, Japan should fare better.”

To contact the reporter on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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