Surging fund flows into US equities signals optimism
- Time to relook Technology; sharp upward earnings revision and moderate price gains has led to 12% contraction in forward P/E multiple
Portfolio flows into US equities far supersedes other regions. Investors’ enthusiasm on the US reflation trade equities is seeing no signs of abating. Based on data from EPFR Global, US registered funds inflow of USD179b year-to-date (YTD) and this far supersedes total flows of USD27b registered for the entire 2020. The enthusiasm on the other regions is, however, lukewarm. Europe and Japan registered respective flows of USD16b and USD9b, while flows into Asia ex-Japan is equally weak at USD12b.
Positive momentum for US equities to sustain. Taken together, the strong flow of funds into the US underlines broad-based conviction on the market as the domestic economy continues to recover strongly from the ashes of the pandemic. We expect the positive momentum for the S&P 500 Index to sustain in the coming months given:
1) Strong macro momentum: Macro momentum in the US remains robust and this is evident from the ISM Manufacturing, which has maintained above the “50-mark” (at 60.7 in April). US unemployment has also been falling steadily (at 6.1% in April) and this augurs well for the outlook of domestic consumption.
2) Strong earnings momentum: US earnings stay robust as 87% of the companies reported positive earnings surprise in 1Q21, led by Technology and Financials. We expect the strong momentum to persist.
3) Monetary accommodation: The Federal Reserve’s ultra-loose monetary policies remain as policymakers continue to view the recent spike in inflationary pressure as transitory and hence, ruling out the likelihood of premature policy tightening.
4) Improving Covid-19 situation: The sharp downtrend in daily new Covid-19 cases and high vaccination rollout suggest that the government has put the pandemic under control, and this is positive for US economic outlook.
Sharp valuation contraction: Time to take a relook at Technology. Technology has underperformed the S&P 500 substantially this year as investors piled onto the asset reflation trade via Financials and Materials. But investors should be mindful that Technology earnings remain robust. This is evident from the recent earnings season which saw Technology reporting 96% earnings surprise, while 89% of the companies saw top-line revenue growth during the quarter.
The timely combination of sharp upward earnings revision and moderate price gains has resulted in a 12% contraction in forward P/E multiple this year. This provides an opportunity for investors to build long-term strategic positions in this space.Figure 1: Sharp flows in US equities; Technology valuations has contracted
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