Morningstar stated in its Expert Panel Economic Briefing for April 2014 that while an improved global outlook may justify having an overweight allocation to international equities, investors are paying too much and failing to consider the risks and uncertainties.
One of the panellists noted there is “not much buffer in valuations to cope with any setbacks”.
While the panel felt the US economic recovery was “broadening” with the S&P 500 generating 1.3 per cent over the quarter and 192,000 jobs being created in the economy, it believes these valuation issues are “particularly acute in the US market”.
According to the panel, this is especially prevalent in certain sectors such as IT, biotech and health.
“When markets hit new highs, I’d plan to trim back exposure, especially to US equities,” said one of the panellists.
Some members of the expert panel believe it may be worth considering an increased exposure to emerging markets as they offer better value.
“I’d be taking some advantage of any volatility to look at emerging markets and I’d draw a distinction between the extended valuations in the developed markets and the much better valuations on offer in some of the emerging markets,” said one of the panellists.
While international listed property outperformed global equities over the quarter with the Global Property Index providing a total return of four per cent, the panel believe property equity valuations are among the most expensive of the overvalued markets in developed countries.
The Expert Panel said “yields are already too low and will become more uncompetitive as bond yields rise”.
“If the Wall Street Journal’s consensus poll of forecasters is right, by the end of next year the US 10-year bond yield will have risen to equal the current yield on US REITS (3.9 per cent),” Morningstar said in the briefing.
