Everyone Hates U.S. StocksLu Wang
Not since the year of the credit crisis have the world’s biggest investors had a lower opinion of American equities.
With interest rates poised to rise and Europe ascending, the percentage of global money managers who are underweight American equities is the highest since 2008, a survey by Bank of America Corp. shows. At the same time, clients of exchange-traded funds have pulled about $14 billion from U.S. equities this quarter and added $29 billion to international stocks, data compiled by Bloomberg show.
Souring sentiment is a reversal from the last two years, when money flowing to the U.S. was double that going elsewhere. The Standard & Poor’s 500 Index trails virtually every developed market in 2015 as accommodative central-bank policy from Europe to Japan lifts valuations and the Fed winds down programs that helped share prices triple since 2009.
“The U.S. stock market was an island of opportunity for a number of years,” Stacey Nutt, chief investment officer who oversees about $4 billion at ClariVest Asset Management LLC in San Diego, California, said by phone. “It has lost that status, not because it’s negative, but because other places around the world have started becoming more attractive.”
The percentage of money managers holding fewer American stocks than the country’s weighting in benchmark indexes exceeds those overweight by 19 percentage points, according to a March 6-12 poll of 207 money managers in Bank of America’s survey released Tuesday. That compared with a net 6 percent overweight in February.
After beating global stocks every year since 2009, the S&P 500 is up 0.7 percent since January, compared with a 2.1 percent advance in the MSCI World ex-USA Index. The U.S. gauge is on pace for the worst quarterly performance compared with the world index since the third period of 2013.
Better returns elsewhere are luring investors away after American stock ETFs attracted nearly $350 billion in the past two years, compared with the $160 billion that flowed to international equities.
Europe, in particular, has gained favor, as the Stoxx Europe 600 Index has rallied 16 percent so far in 2015, with benchmark indexes in Germany, Portugal and Denmark rising more than 20 percent. The gains came as European Central Bank President Mario Draghi introduced a 1.1 trillion-euro ($1.2 trillion) quantitative-easing program aimed at spurring growth and thwarting deflation.
The WisdomTree Europe Hedged Equity Fund has absorbed $8.4 billion this quarter, the most among all equity funds. By contrast, the SPDR S&P 500 ETF Trust, the biggest ETF tracking the U.S. benchmark gauge, has seen the biggest outflows, with investors withdrawing $31.2 billion.
A net 35 percent of respondents in Bank of America’s survey picked the U.S. as the worst place to invest in the next 12 months, the most in almost a decade, while the proportion of those favoring Europe jumped to a record 63 percent.
“There has been a mindset change,” Jeffrey Saut, chief investment strategist at Raymond James Financial Inc., in St. Petersburg, Florida, said by phone. “The crowd now thinks that the quantitative easing program that Draghi has put on is going to do the same as it did here.”
Negative sentiment by fund investors toward U.S. equity markets has been of little consequence for American stocks since the bull market began in 2009. The S&P 500 has risen in five of the last six calendar years, a stretch that encompasses $93 billion in outflows from funds in 2012, when the S&P 500 jumped 13 percent.
Most of the bull-market gains came as individuals plowed money into the fixed-income market after living through the S&P 500’s 57 percent plunge from October 2007 to March 2009. To some investors, skepticism has been the fuel for advances, leaving pools of unconvinced speculators to change their minds and buy as gains snowballed, especially in 2013 and 2014.
Hedge funds have raised their bets against equities, sending a gauge of manager sentiment to the lowest level since October, a survey from Evercore ISI showed. The measure of hedge fund long versus short bets fell to 49.6 in the week ending March 11, from 50.3 the previous week. Its low point in 2014 was reached in October, when the S&P 500 suffered the year’s worst retreat of 7.4 percent from Sept. 18 to Oct. 15.
“I can understand the rationale of being discouraged, thinking the U.S. is not the place to be, but we are still favorably inclined toward the U.S,” Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital, said by phone.
Relatively higher valuations and a dimmer profit outlook are taking a toll on American stocks. After surging 207 percent during a six-year bull run on the back of Fed stimulus and a doubling in corporate profits, the S&P 500 trades at 18.5 times earnings, near the highest level since 2010. That compares with a multiple of 17 for the MSCI world index.
The proportion of investors in Bank of America’s survey saying U.S. equities are overvalued has reached its highest since May 2000 at a net 23 percent.
Earnings from American companies are forecast to post the first back-to-back profit contractions since 2009 as the dollar’s ascent to highs not seen since the invasion of Iraq hurt sales for firms like Procter & Gamble Co. to Pfizer Inc., analyst estimates compiled by Bloomberg show.
By contrast, a net 38 percent of respondents in Bank of America’s survey say that they expect double-digit earnings growth in Europe in the next 12 months.
“It’s U.S. good, Europe better,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said by telephone. “I wouldn’t say anything bad about the U.S. at this point. If I were pushed, I’d lean toward Europe in the next two years but it wouldn’t be any more than a shallow lean.”
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