With Wall Street defying gravity, despite a small correction last week, most are looking elsewhere for value. But some investors continue to be attracted to the American market, saying you can't get the same quality of company, or the same tax treatment, anywhere else.
While a majority of fund managers are considering decreasing their exposure to equities, particularly US equities, believing them overvalued, Japanese global fund manager Nikko AM has been most bullish on equities for some time – a stance that includes the United States.
John Vail, Nikko AM's chief global strategist, noted last week that while US equities aren't cheap, they're only "too expensive" if US President Donald Trump is unsuccessful in getting his policy agenda through.
If the tax cuts do pass, it's entirely plausible that US stocks will keep rising through this year, potentially by 10.6 per cent in the next 12 months, justifying the fund manager's overweight stance on US equities.
"[We] think significant portions [of Mr Trump's economic agenda] will be enacted and that the global economic reflation cycle will be hard to stop," Mr Vail wrote.
"Interest rates will rise, pressuring valuations a bit but, crucially, we do not expect them to rise too rapidly and the Fed policy will remain quite accommodative."
'Overweight stance' justified
"US deregulation and accelerated share buybacks are further icing on the cake, and although there are moderate profit headwinds from a mildly stronger US dollar, 2017 and 2018 earnings should be quite strong," Mr Vail says.
"Currently, because the tax cuts are not legislated, analysts are not adjusting their earnings per share forecasts, but this is likely a major anomaly that makes the market much less expensive than it appears.
"Indeed, we estimate that the market is trading on about 16.5 times calendar year 18 earnings per share (and even less if buybacks due to the repatriation 'holiday' are greater than expected). In sum, these factors should send the S&P500; to 2502 (6.3 per cent total unannualised return from our base date) at [the end of] September and 2581 in March 2018 (a 10.6 per cent total return), which is higher than its peers and, thus, justifies an overweight stance."
Nikko AM's stance is all the more surprising when one considers how much Wall Street has risen already since President Trump's election – it's up 9 per cent since November 8. From January to the middle of last week, it spent 108 days without a 1 per cent correction – the second-longest bull run in the S&P500;'s history.
Despite the heady valuations, boutique British global equities manager Intermede Investment Partners is another pointing out the attractiveness of Wall Street. CEO and portfolio manager Barry Dargan told Fairfax Media that industry profitability in many US sectors is consistently high – a factor Mr Dargan ascribes to greater industry concentration.
Consolidation of industries
"If you look across most industries, there are fewer players, and the top three have gone from 25 per cent of market to 35 per cent of the market in many industries. This consolidation of industries have seen a rise in average profitability. There's more persistence to this over-earning – with higher margins, higher returns.
"If you've got high margin, it's likely to get competed down. That's what classical economic theory tells us. But that's not happening now. We think that because companies have become very good at buying up nascent competitors.
"And the other factor is the internet. A lot of business models which work very well on the internet create a natural moat, behind which profitability grows. Google, Facebook, Amazon and others all have network effects [that make it hard for new entrants].
"The US market does look expensive relative to history on certain measures, like price earnings...But we feel that the market is not as expensive as it seems."