The risk of shunning US equities now

Some investors are pulling their money out from equity funds over concerns of an impending US recession. Nevertheless, the Singapore-based Multi Asset Solutions team believes that, crucially, the US economy remains in good shape, and that a near term US recession is highly unlikely. In light of this, investors shunning equities now will run the risk of missing out on the growth opportunities. Selectivity, however, remains key.

Since the fourth quarter of 2018, market sentiment has swung significantly. A reversal of the Federal Reserve’s interest rate stance in January, as well as other central banks embarking on an easing path, have fuelled a strong run in equity markets. The collapse of trade talks between the US and China, in May, ratcheted up market volatility - despite a temporary truce in June alleviating some of the tension. Most recently, the retirement of John Bolton from President Trump’s inner policymaking circle could be a harbinger of a more conciliatory tone going forward – an underappreciated positive for markets.

Thanks for subscribing!

Follow us :

The rush to safety

The apprehensions earlier this summer have seen more investors become increasingly concerned about an imminent market crash, with many looking for safe havens to protect their wealth. Since mid-2018, this rush to safety can be seen in in the capital outflows from equity funds to fixed income and money market funds (see Fig. 1).

Fig. 1: Estimated net flows of open-ended and exchange traded funds world-wide1

The-risk-of-shunning-Fig-1

In particular, for the year ended 31 August 2019, US equity large cap growth funds posted roughly USD61.3 billion worth of net outflows, according to figures from Morningstar2. This is despite the S&P 500 index reaching all-time highs, and the US consumer continuing to be resilient, underpinned by a low unemployment rate.

One widely discussed force behind such outflows is the fear of an impending US recession, which we argue is a remote possibility at this juncture.

Behind the recession fears

Fanning the fears is the higher yield of the US 3-month bills over the 10-year Treasury bonds. This aspect of the inverted yield curve is represented by the 10Y-3M yield spread falling into negative territory (see the red line in the black circle in Fig. 2).

Fig. 2: US yield curve slopes and recessions3

The-risk-of-shunning-Fig-2

Upon closer inspection, however, the 10Y-2Y (the yellow line) has only recently inverted, and importantly, longer term measures of the yield curve, such as the 30Y point, still exhibit a relative ‘perkiness’ – albeit the entire rate spectrum is lower than many would have previously expected. This, at first glance, is actually better than it looks, in so far as the recent sharp fall in long and short end rates allow for lower mortgage and other rates that will likely help home sales and fuel refinancing, thus putting more money into the hands of consumers.

This economy is far from being on its last legs!

A further factor to consider in relation to the yield curve – is that the lag between inversion and actual recession onset can be both long and variable. The onset of any subsequent bear market tends, in recent cycles, to be beyond the immediate investment horizon of most professional investors – meaning that there are often outsized positive gains to be made, for those with the courage of their convictions.

On a more comforting note, credit spreads imply that investors are assigning a low probability to a recession. US corporate spreads are currently sitting below their historical averages (see the black circles in Fig. 3). Put simply, lenders require less interest to compensate for financial risks, reflecting their confidence in the borrowers’ businesses.

Fig. 3: Credit spreads are below historical averages4

The-risk-of-shunning-Fig-3

Considering all of this, if the Fed stays proactive and cuts interest rates, a recession could become a relatively distant possibility. As a result, investors who are now eschewing equities will risk heavily missing out on the growth opportunities.

Prospect of a longer expansion

With sweeping corporate tax cuts and banking deregulation firmly in place, the US economy should remain in good shape. The missing link would seem to be at least a partial resolution to the trade war uncertainty – something we can likely look forward to in advance of President Trump’s bid for re-election in 2020.

Whilst a near term recession does seem unlikely, a key question now is how long the current expansion can be extended. Key factors will be:

  • The 2020 US presidential election
  • A US-China trade deal
  • The Federal Reserve policy

If President Donald Trump wins a second term, his enacted policies, together with the recently passed budget deal to raise fiscal budget caps and the nation’s borrowing limit, will sail through to 2021 onwards, and thereby provide more support for a longer expansion.

In addition, a successful trade deal with China will also play a role in maintaining the current expansion. With a US-China trade deal in place, a healing process can begin to buoy the global economy. Without a deal, American consumers and manufacturers will be hurt by the extension of even more tariffs to and from China. The jury is still out.

Weighing all of this up holistically, market valuations are easily justified given lower interest rates, and that corporate earnings can continue to grow by a good amount. Fig. 4 shows that the S&P 500 index is only trading at 17 times forward price-to-earnings (P/E), which is within the fair-value range of recent years.

Fig. 4: US equities (S&P 500) trade in a comfortable zone (forward price-to-earnings)5

The-risk-of-shunning-Fig-4

P/E multiples typically swell in Fed easing phases. This, coupled with mid-single digit earnings growth, can easily justify an expectation of good returns. Add in a dividend and buyback yield of (combined) almost 4% - and one could be forgiven for starting to feel really quite bullish.

Of course, risks abound however - and visibility remains lower than at similar points in previous cycles. The Multi Asset Solutions team in Singapore remains alert to the various risks. Whilst we remain vigilant, and alert for ‘sell triggers’, US equities remain a core overweight from a multi asset perspective, pending ongoing assessment of the global macro key drivers.

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore and Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws.

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.


Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).


Malaysia by Eastspring Investments Berhad (531241-U).


This document is produced by Eastspring Investments (Singapore) Limited and issued in Thailand by TMB Asset Management Co., Ltd. Investment contains certain risks; investors are advised to carefully study the related information before investing. The past performance of any the fund is not indicative of future performance.


United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.


European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.


United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.


Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.


The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.


The views and opinions contained herein are those of the author on this page, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this posting is at the sole discretion of the reader. Please consult your own professional adviser before investing.


Investment involves risk. Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.


Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.


Eastspring Investments (excluding JV companies) companies are ultimately wholly-owned/indirect subsidiaries/associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.