Wall Street is approaching fully-valued but shrewd investors may find a tactical opportunity arising from this month’s sell-off which almost tipped the Nasdaq into correction territory.
DWS’s Hong Kong-based chief investment officer for Asia-Pacific, Sean Taylor, says that US stocks are at interesting levels and he is searching around for a suitable entry point into Chinese equities.
Mr Taylor, who is also global head of emerging markets at DWS which manages €687 billion ($1.1 trillion), remains positive on the global growth backdrop.
There’s been some profit taking going into the end of the year, he says, but the selling has been overdone after investors took fright at higher US Treasury yields.
“Tactically, the US is a buying opportunity,” he says. “In the short term, we think that there’s been too much of an overreaction and earnings will come through in the US.”
The largest American companies – including the technology companies that have led the losses since the start of October – are looking interesting at current levels, he said. “I think that those areas got slightly overbought” ahead of the October sell-off in the US, he adds.
On the valuation side, the investment chief is not expecting US Treasury yields to move above 3.5 per cent as a sustainable level.
“We are essentially in the camp where we think that above-trend growth will normalise to trend,” he says. “We don’t think that the yield curve is going to invert.”
Investors have taken a lead from President Donald Trump’s efforts to put America at the front of the queue, diverting attention away from other markets. “The market has been driven by this change in policy and appreciating US assets. That’s been hard to stay away from.”
However, US markets are approaching fully priced, he says, and “next year will be a turning point.”
Economic growth of 2.4 per cent for 2019 in the US along with reasonably good earnings growth will remain a source of support “but we are valuation constrained”.
Mr Taylor says that, in contrast, China could be a tactical buy in three months’ time.
The fund manager is expecting GDP growth of 6 per cent next year for China as policymakers continue to steer the mammoth economy towards the consumer.
He acknowledges that 6 per cent would represent a slowdown in Chinese GDP growth, which expanded at a slower-than-expected 6.5 per cent pace in the three months to the end of September.
Mr Taylor is willing to wait to start buying in China – a market that he acknowledges is “very sentiment driven.”
“It’s a buying opportunity but the catalyst is hard to identify,” he says. Broadly, there needs to be a stabilisation of growth, of trade tariffs and the US dollar so that the Chinese currency is under less pressure.
He gives a couple of reasons why the Chinese won’t undertake a one-off devaluation of their currency: the central bank likely doesn’t want a one-way bet on the currency, and the Chinese government needs a stable currency to deliver a better quality of life to the population.
This is also true for delivering on its ambitious global “one belt one road” infrastructure plan, he argues.
“There’s been a change in focus in China,” he says. “If we hadn’t had the trade situation then we would have seen outperformance. The moment that trade concerns are cleared up, I think that will happen.”