Wealth Strategies

St James's Place Stays Underweight US Equities Amid Hot Valuations, Prefers Europe, UK

Tom Burroughes Group Editor London 28 May 2024

St James's Place Stays Underweight US Equities Amid Hot Valuations, Prefers Europe, UK

The UK wealth manager recently gave an update on its overall equities asset allocation positions, reflecting on what it sees as the high valuations for US equities and its preference for holding stocks in other markets. St James's Place operates in a number of locations, including Asia.

St James’s Place is neutral on equities and has a slight underweight stance on the US stock market because this market is “overvalued,” a senior figure at the UK wealth manager says.

“We are thinking that [US] valuations are very stretched,” Hetal Mehta, head of economic research, said at a briefing for journalists last week. 

“The core of our process is valuation,” she said. 

Wielding one of the larger financial clubs in the domestic wealth market, the firm had more than £179 billion ($227.5 billion) of assets under management at the end of March this year – up from more than £153 billion a year before. 

The UK wealth manager's preference for diversification leads Mehta, for example, to be concerned that the US stock market shows a heavy concentration among the so-called “magnificent seven” stocks.

SJP is also keeping to its overweight position on emerging market equities because they look cheaply valued against developed market peers, she said. The firm has an overweight stance of around 5 per cent, she said. 

As for European equities, Mehta said the firm takes a slightly more overweight position. 

“European equities are also depressed, but attractive relative to the US and with a different sectoral composition to the UK. This makes them a compelling opportunity and therefore we are overweight circa 7.5 per cent in this asset class,” she said.

Speaking to WealthBriefing a day before Rishi Sunak surprised markets by announcing a 4 July election date in the UK, Mehta said that domestic equities are out of favour, but there are signs of improvements to come. 

“UK equities are a deeply unloved asset class at present, trading at historically depressed valuations. There are some indicators of rising corporate activity. Therefore, we are now overweight circa 2.5 per cent UK equities,” she continued. 

These overweight positions come at the expense of US stocks: SJP has an underweight position of around 15 per cent relative to the MSCI ACWI benchmark.

A few danger signs
Some signals of a possible recession, such as super-low unemployment, and high wage growth – usually signalling a need for a monetary pushback – are still flashing red. “The US economy is still not quite out of the woods.”

She said that labour market tightness, and the impact of falling labour force participation, is more pressing in the UK than the US. 

UK slack?
“There is a bit of slack in the UK labour market,” Mehta said. “There are some cracks on the employment side in the UK.”

Away from broad asset allocation views, Mehta was asked about how new technologies might affect investment ideas in the medium term. Naturally, the topic of artificial intelligence arose. 

The world is some way off yet in seeing the kind of transformative impact of AI that came from the internet 30 years ago. One difference between understanding the impact of AI now and comparing it to the internet is that AI is likely to be far more heavily regulated by the state, such as in the European Union, she said, than was the case with the internet. “There are a lot more concerns around.”

When trying to understand the shape of macroeconomic policy and broader political direction, it is necessary to take into account that many developed countries’ leaders have been in damage-control mode for the past few years – particularly since Covid-19, Brexit and the Russia/Ukraine episodes. Consequently, this firefighting has reduced the opportunity for policmakers in the West to concentrate on long-term strategic planning, Mehta said.

All that said, economists always talk about the difficulties caused by current uncertainties, but the pricing of markets in the US and Europe doesn’t suggest a general avoidance of risk, she said.

Asked about the dollar’s status as a reserve currency and heavy debt, Mehta noted how, in the past, there was an inverse link between unemployment and the US deficit. Now it appears that the deficit has gone on rising even with very low rates of unemployment.

If or when worries about US debt levels become harder to ignore, there will be a spill-over effect on the UK bond market.

“Whoever wins [the US presidency] there is little coming out from either side suggesting that they are going to rein it [public debt] in,” she said. 

Mehta concluded by noting that there is a consensus, of sorts, about a move towards a more isolationist trade and foreign policy by the US, as on the subject of protectionism and trade relations. To a certain extent, the same can be seen with a bipartisan approach to China.

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