Investment manager Seneca has caused a stir in the industry today, saying that it will completely eliminate exposure to US equities in its Global Income & Growth Trust.
The firm believes that the US has moved from the “recovery” phase of the business cycle to the “expansion” phase, at which point the tightening of monetary policy will start to hold back equities prices.
Other developed economies such as the Eurozone, Japan and the UK are still in recovery phase, Seneca argues, as evidenced by interest rates that have yet to be increased.
“Within equities we've been reducing the US because we feel it is much later in its business cycle than other areas. Therefore it's much closer to the point at which equities start to perform poorly,” said Peter Elston, chief investment officer at Seneca.
“The evidence that I draw on stems from looking at the unemployment rate in the US, which is close to an all-time low. We're starting to see inflation pick up after it's been falling, which will justify further increases in interest rates.”
Other professionals in the investment industry expressed surprise at Seneca's decision.
“We have no plans to reduce our weighting of US equities,” said David Coombs, head of multi-asset investments at Rathbones. “I find it hard to generalise by geographic locations of companies, because a lot of the areas we want to invest in over the next two years or more are responding more to significant structural changes.”
Andrew Milligan, head of global strategy at Aberdeen Standard Life, said that although he had “sympathies” with several of Seneca's reasons for withdrawing from the US, he would also make counter-arguments.
“Going forward, our estimates are that the US will continue to see quite decent profits growth into 2018. Some parts of the world may do better, but nevertheless I would have some weighting in the US,” he said.
“The US benefits from one very important sector – technology. In the S&P 500, about a quarter of the market is now tech. A decision to underweight the US is almost a sector call.”
Coombs noted similar reasons for maintaining a position in US equities, and added:
I want to invest in more sophisticated companies, and I find a lot of them are in the US. Just because they're in the US, I'm not just going to stop buying them for overarching macro reasons.