Fed Alarm Has $8.5 Billion Swedish Money Manager Dumping Risk

  • SEB Investment Management avoiding U.S. stocks, prefers Asia
  • SEB funds reduce maximum amount of risk to 40% from 85%

SEB Investment Management is avoiding U.S. stock markets and dramatically cutting its risk allocation as the prospect of tighter monetary policy from the Federal Reserve transforms the global landscape for investors.

The manager of 70 billion kronor ($8.5 billion) in multi-asset funds, which form part of the 800 billion kronor in assets under management at the bank created by Sweden’s Wallenberg family, is instead shifting focus to Asia and Europe. That way it can avoid developments in U.S. stock markets, where it finds valuations high, says Hans Peterson, global head of asset allocation and chief investment strategist. The prospect of wage growth is also set to erode profit, according to SEB, which expects the Fed to raise rates in the fall.

“Markets that have been pushed to high valuations because of the low interest rate environment include the U.S. stock market and the government bond markets, which are expensive,” Peterson said in an interview in Stockholm. “We are trying to find returns by moving our investments east, to Asia and also to some extent Europe.”

Have U.S. stocks become too expensive?

Though traders have scaled back their bets on how quickly the Fed will raise rates, the prospect of tighter U.S. monetary policy at some point this year is forcing investors to adjust their portfolios or risk being caught on the wrong side of markets when the tide turns. Goldman Sachs cautions that the Fed may well raise rates faster than traders foresee. While higher Fed rates will probably limit U.S. stock returns, the dollar is likely to do well, according to SEB.

The S&P 500 trades at 16.5 times estimated earnings, more than 9 percent above the valuation of the MSCI All-Country World Index. Global stocks fell for a second day and the dollar strengthened against most of its major peers on Wednesday at the prospect of higher U.S. interest rates.

Two regional Federal Reserve bank presidents -- Atlanta Fed President Dennis Lockhart and his San Francisco Fed colleague John Williams -- said at least two interest-rate increases may be warranted this year as the economy continues to expand and inflation is picking up.

Given the global monetary environment, Asia is the place to be, Peterson says. It’s a region where there is “room for a constructive policy, both in terms of lower rates and also structural reform of the capital markets,” he said. SEB says China’s measures to improve the functioning of its capital markets is also encouraging.

Exiting Risk

While SEB is shifting away from the U.S. and into emerging markets, it’s still cutting risk. Over the past 10 months, it has gone from using 85 percent of the maximum risk it is allowed to take, down to 40 percent, according to Peterson.

Given the tectonic shifts set to hit global markets, the risk of mispricing is considerable. At SEB, Peterson say he has “moved the profile of our portfolio toward more value investment.” Consumer staples and health-care stocks -- considered so-called low-cyclical sectors -- may be overpriced as the spread between such assets and sectors that move in lockstep with the general economy gets smaller, Peterson said.

“It’s an opportunity to buy cheap value,” he said. But in Asia, “you have to play that scenario carefully when it comes to emerging markets, as they are now driven by consumption as opposed to before, when infrastructure investments in emerging markets led to a commodity upswing.”

Corrections Ahead?

An example of mispricing may be in some corners of corporate credit. “There has been much uncertainty surrounding the energy sector, which has raised credit risk in that sector in the U.S.,” Peterson said. “Credit risk is decreasing, but still at relatively high levels and offers attractive valuations.” For European investment-grade corporate bonds, the European Central Bank’s role as “a buyer of last resort” is supporting that market, he said.

Peterson says SEB has also returned to the high-yield bond market, which it left after oil prices plunged, as it builds its holdings in emerging markets and commodities.

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