"Exceptionalism of US Stocks" coming to an end? Wall Street institutional investors: Better investment opportunities in Europe and Asia

In the past, investors generally believed that the United States, as the world's largest economy, could outperform other countries even in a high-interest-rate environment. Under this so-called "American exceptionalism" theory, the U.S. stock market has been bullish and repeatedly hit new highs. However, many existing signs indicate that this theory no longer holds.

While consumption remains strong and the artificial intelligence boom has brought some optimism, the U.S. economic growth fell to its lowest point in nearly two years in the first quarter, inflation remains high, and the risk of stagflation is increasing. At the same time, investor confidence is starting to waver, with the S&P 500 index ending its five-month winning streak in April, and heavyweight companies experiencing consecutive performance setbacks.

Therefore, several institutions believe that high interest rates are impacting the health of the U.S. economy and businesses. Conversely, Europe and Asia have lower valuations and milder inflation prospects, thus offering better investment opportunities.

Since the end of March, the S&P 500 index has consistently lagged behind major European and Asian stock markets, whereas in the previous five quarters, U.S. stocks performed better for most of the time.

According to the latest reports from the media, Luca Paolini, Chief Strategist at asset management company Pictet, stated:

"American exceptionalism is overrated. People are too optimistic about U.S. economic growth and too pessimistic about the rest of the world."

Paolini explained that Pictet has been reallocating funds from the U.S. to Europe in recent weeks, favoring domestically-oriented industries such as consumer goods and banking, and bullish on the UK stock market due to exposure to commodities.

Significant Improvement in European Market Sentiment

A survey by Bank of America Merrill Lynch showed that last month, global fund managers' allocation to European stocks reached the highest level since February 2022.

J.P. Morgan stated at the end of last month that European stock valuations are more attractive, which could lead to a greater improvement in the risk-return ratio of Eurozone stocks compared to the U.S.

One positive sign of this shift in sentiment is that the S&P 500 index has consistently lagged behind major European and Asian stock markets since the end of March, whereas in the previous five quarters, U.S. stocks performed better for most of the time.

Furthermore, the European economy is accelerating its recovery, and there are indications that the European Central Bank and the Bank of England may ease monetary policy before the Federal Reserve.

Monica Defend, Head of Investment Research at Amundi, the largest asset management company in Europe managing over $2.1 trillion in assets, stated that the company maintains an underweight position in U.S. stocks in its global equity portfolio, overweight in UK stocks, and neutral on European stocks.

"U.S. tech stocks are overvalued, and you wouldn't want to be exposed to consumer-oriented industries when the economy is slowing down," Defend said, "The narrative of declining inflation is much more believable in Europe than in the U.S."

The Rise of Asia?

Compared to Pictet and Allianz, other asset management companies are shifting more of their focus to Asia.

T. Rowe Price, managing around $1.5 trillion in assets, has increased its investment in Asian stock markets this year, while also maintaining a significant position in the US stock market.

Rahul Ghosh, a global equity portfolio expert at the firm, stated that amid uncertain economic prospects in the United States, countries in Asia with strong export and domestic demand growth may outperform other regions.

Ghosh mentioned that one of T. Rowe Price's "focused strategies" is to increase exposure to financial and technology stocks in Indonesia and South Korea, while diversified funds have increased their holdings in Chinese stocks this year.

Although the delay in interest rate cuts by the Federal Reserve may bring pressure to Asian central banks and foreign capital inflows, Asia's overall low inflation levels are favorable for economic growth.

In terms of valuations, Asia also holds an advantage. The expected price-to-earnings ratio of the MSCI Asia Pacific Index is around 14 times, comparable to European benchmark indices, while the S&P 500 Index is at 20 times.

Meanwhile, institutions like Pictet and Allianz hold higher positions in the Japanese stock market. A weak yen benefits exports, while upward inflation is favorable for domestic manufacturing companies