US markets are getting tired and valuations are certainly looking a bit expensive when already this year Europe and Japan have massively outperformed the US market, said Larry Kantor, head of research at Barclays.
While both the US and Europe are benefiting from low inflation and low oil prices, the dollar has strengthened while the euro has gone down, indicating there’s still upside left in Europe.
Also, there’s less fiscal tightening in Europe amid improving credit markets. The European Central Bank’s quantitative easing program has just started and investors are likely to witness better opportunities there, he added.
The European economy is still not out of the woods, while the US economy is nowhere near a crisis. Asked if the US economy can withstand interest rate normalization since there are many benefits of exiting the “crisis-mindset” that is prevalent across the economy, Larry answered in affirmative.
While the Fed recognizes the benefits of raising rates, it’s very worried about upsetting the financial markets. The Fed has always been on the dovish side in all the FOMC meetings that took place in the last 6-7 years.
The US economy no longer needs a zero-rate regime though the Fed is going to remain extremely cautious as the economy chugs ahead. Also, a zero-rate regime eliminates the possibility of a rate-cut if economic conditions warrant such a measure in future, he noted.
Asked to comment on US market performance, Larry said the S&P 500 is likely to grow in single digits this year, but added a correction could not be ruled out, since US markets have not witnessed a pullback in the last couple of years.
Asked why the US markets can not withstand a rate hike when the economy is ready for a rate hike, Larry said investors should focus on earnings rather than the economy. Historically, whenever there has been a Fed rate hike, markets have always moved higher leading to the rate hike and moved still higher a year later.
But, at those times, earnings were usually growing in double digits. Right now, earnings are expected to grow at single digits or even low single digits. Two issues are hitting earnings growth currently; one, drop in energy prices and two, the strengthening of the US dollar. In contrast, investors are yet to witness earnings-growth on the back of what’s becoming an economic recovery in Europe. Investors should go with faster earnings growth and that holds true for Japan as well, he concluded.
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