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'Overvalued' US market and appreciating growth stocks not a sound bet for the future

Publication Date: 11 Oct 2018 - By ReachX Team By ReachX Team
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Macro Equity Fundamental Equity EU ex-UK USA Asia ex-China China UK

The strategy of owning lowly valued stocks with strong balance sheets and attractive dividend yields will prove successful over the long-term, according to two City fund managers. 

Graham Campbell and David Keir, Co-managers of the Saracen Global Income and Growth fund which is focussed on cyclical and value stocks, including many European equities, say the “overvalued” US market and appreciating growth stocks are not a sound bet for the future. 

The continued outperformance of both the US market and of growth stocks has proven a challenging backdrop for the Saracen Global Income and Growth fund. But, Keir notes: “Although the European Union has its problems given the current valuation premium, the continued outperformance of the US market is remarkable, and we would argue unsustainable. 

“Growth stocks and bond proxies have all performed strongly given the backdrop of quantitative easing and low interest rates. Looking ahead, we expect market leadership to change as interest rates rise and central banks’ balance sheets normalise. This should benefit fund performance given our cyclical and European bias.

Campbell adds: “Whilst we are clearly non-consensual with our current positioning, we strictly adhere to our investment process. This has resulted in finding more investment opportunities that would be described as ‘Value’ and these businesses are more frequently domiciled in Europe.” 

In addition, the valuation of European markets is at a 25-year low and the relative underperformance remains at a 2-standard deviation event, or around a 5% probability. 

Although there is political pressure on drug prices, Saracen considers the sector likely to be a major beneficiary of demographic trends and of growing demand in emerging markets. 

The fund benefited this quarter from strong global performance in the healthcare sector, with holdings in Roche, AstraZeneca and Pfizer posting strong quarterly results. 

Furthermore, after the recent correction in emerging markets, the fund analysts are also focusing research to look for undervalued opportunities.

 

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