Investors should favour international equities at the expense of U.S. stocks in the year ahead, suggests BCA Research.
In a research note, the Montreal-based independent research firm says that the underperformance of the U.S. stock market, which began about six months ago, should continue.
It cites valuation as one reason. BCA notes that, while U.S. stocks aren’t yet expensive, markets in Europe, Japan and China are much cheaper, based on price to book and forward P/E ratios.
Second, it suggests that “the U.S. economy has passed its most dynamic phase of the profit recovery, and earnings growth has flattened out. Meanwhile, the recovery in the rest of the world has just begun.”
And, finally, fiscal policy is more favourable in other regions, it says. “The fiscal drag from the U.S. federal government is front loaded and the impact will be mostly felt in the first half of the year,” it says. “For Europe, however, severe fiscal austerity has crested and most crisis-stricken countries are adopting much softer targets or measures to regain their fiscal balance.”
Meanwhile, in Japan, it notes that the government has announced a new stimulus package amounting to 2% of gross domestic product. As well, in China, “the government has been actively beefing up fiscal spending on infrastructure”, it says.
“As a result, there is a clear de-synchronization in fiscal policy among the major world economies: the U.S. is getting more austere while policy in the rest of the world is becoming more stimulative,” it concludes.