It’s time to trim exposures to the US equity market.

The major headwinds facing the US economy are well documented:

  • US Dollar strength that is deflationary, reduces competitiveness of US exports and negatively impacts earnings of US MNCs that receive off- shore revenues in non-USD;
  • Impending interest rate hike by the US Federal Reserve. This policy move raises USD borrowing costs and is widely expected to trigger a decline in US stock prices;
  • Cheaper oil, while currently positive for consumer spending power, is deflationary and runs counter to attempts by the US Federal Reserve to jumpstart inflation. Also, lower oil prices have led to downsizing in the shale oil sector with accompanying job losses;
  • Low population growth and unimpressive productivity gains – two long-term challenges highlighted by the International Monetary Fund in Washington on April 14th.

Yet, these headwinds are not evident if one looks at the US equity market. Major US equity indices remain at all-time highs with extended valuations. The S&P500 trades at 18.5 times earnings versus MSCI World which is at 17.0 times. This disconnect between economic reality and market sentiment calls for caution. Indeed, there is an rising chorus from investment strategists, fund managers and economists from the International Monetary Fund, Bank of International Settlements, OECD, as well as the former US Federal Reserve Chairman, Alan Greenspan, warning of a major stock market correction. There is evidence that some investors are taking note and have reduced their stakes in US equities. A recent Bloomberg report “Everyone Hates US Stocks” dated March 18th 2015 highlights that US Equity exchange traded funds (ETFs) have seen outflows of USD14billion in Q1 2015. In the past 2 years, these ETFs garnered inflows of almost USD350billion. Another ETF, the SPDR S&P500 Trust (Bloomberg ticker:SPY) saw outflows of USD31.2billion.

Storm clouds are gathering on the horizon for the US equity market. The severity of the potential disruptions depends on whether an orderly exit can be orchestrated by market participants. Now is the time to review and re- balance equity portfolios and systematically re-allocate exposure to the US equity market.

© Jachin Capital Pte Ltd

UEN: 201419754M

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