‘All in on the laggards’ is Syz Asset Management’s equities motto of the month, with the Geneva-based firm holding a strong favour for European and Japanese equities.
In his latest monthly asset allocation report, Hartwig Kos, vice CIO and co-head of multi asset at Syz Asset Management, explained that the two equity regions are still his top picks, despite the fact that the economic reality in each is not being properly reflected in the equity markets.
The preference is largely down to the allocation team’s view on the US dollar, which has fallen into fair-value territory on a real effective exchange-rate basis. The US Dollar index (DXY) has depreciated by more than 10% since the beginning of 2017.
This pronounced weakness has seen areas that tend to benefit from a weak dollar environment, including emerging market equities, perform very strongly over the course of 2017, he explained.
‘On the other hand, areas which traditionally benefit from a stronger USD, such as Japan and Europe, have been lagging behind the broader equity universe.’
‘At this point, however, the USD is deeply oversold, the Fed is hinting at further interest-rate hikes and some progress appears to have been made regarding US tax reform, all of which indicates that there is potential for a medium-term trend reversal for the dollar, taking the lid off European and Japanese equities.’
Both regional equity markets continue to look cheap relative to US equities, as Europe and Japan currently trade on a 12-month forward price/earnings ratio of 14.7 and 13.7 respectively. This compares favourably with the US equity market, which is valued at 17.9, Kos said.
‘The leading price earnings ratio between the US and Europe is now at its lowest level since the end of 2012, and the differential of the leading PE ratio between Japan and the US equity market is close to its lowest level on record.’
The pronounced difference in valuations between the US, Europe and Japan can also be seen in other measures, Kos reiterates, including the EV/EBITDA (enterprise value/earnings before interest taxes, depreciation and amortisation).
The economic reality is not truly reflected in either of the equity markets, he said, as both regions have been laggards despite having healthier economic outlooks than the US.
In Europe, for instance, economic indicators are as strong as they have been in the past decade, Kos pointed out.
‘The economic backdrop in Japan has been positive too, albeit slightly more muted. Nonetheless, it is evident that the general economic environment is clearly positive for both of these markets,’ he said.
Meanwhile, in equity terms, the UK, Australia and emerging markets in Latin America have been downgraded from ‘mild preference’ to ‘mild dislike’.
Spain in particular has been temporarily downgraded from ‘preference’ to ‘mild preference’ following the uncertainty surrounding the Catalan referendum.
‘While the overall risk stance suggests a mild level of investment conviction about equity markets in general, this very bar-belled country allocation clearly conveys a great deal of conviction about our intra-equity allocation,’ Kos said.