Global equities have recovered rapidly after tumbling this month as technology firms sold off, suggesting investors remain confident about the last of the Trump reflation trades but are taking a more discerning approach to stock-picking.
Despite that recent stumble, MSCI's gauge of world stock markets is less than 1 percent below its record highs and investors continue to pump money into shares.
In the week to Wednesday, global equity funds pulled in $24.6 billion, according to the latest data from Bank of America Merrill Lynch and EPFR. That was the biggest week of equity inflows since the U.S. election in November.
"Stocks are still attractive. There's still money on the sidelines," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
Noting that the market has recently weathered lower inflation numbers, a more hawkish Fed and less rosy economic data, he said: "That's indicative that people who are in don't necessarily want to get out."
The June swoon had threatened to put stocks on track for their worst two-week run since Donald Trump won the U.S. presidential election with pledges of tax cuts and infrastructure spending that enthused investors.
Several aspects of that global reflation trade have already unwound — inflation expectations have fallen, the dollar has given back its post-Trump gains against major currencies, and commodities — led by oil — are on the back foot.
European and Japanese shares, the darlings at the start of 2017, have reversed all of their outperformance versus other regions, while the sell-off in tech stocks that began with U.S. bellwethers such as Apple and Amazon, was seen by some as a sign of wider problems.
Investors put the recent falls at broad index levels down to significant churn between sectors and geographies as funds lock in profits in certain richly valued segments of the market, such as tech, and look to pick up bargains in laggards.
But double-digit earnings growth and attractive dividend yields backed by a broadly upbeat global economy are enough to underpin demand for equities, analysts and investors say, adding that any market wobbles into the summer will be a good opportunity to put more cash to work.
NOT A DAMP CLOTH
Global stocks currently trade at about 16 times forward earnings, in line with their average over the past two decades. Corporate profits, meanwhile, are expected to grow 13 percent over the next year, which is the brightest outlook globally in six years, according to Thomson Reuters data.
But patchy U.S. economic data, a more aggressive tightening stance from the Federal Reserve and the Bank of England, and worries about valuations in stocks most closely geared to economic growth have spurred some shifts in allocations.
"Beneath the surface a more nuanced and multi-layered investment backdrop is emerging," said Michael Ho of UBS Asset Management.
Underscoring both the shifts in allocations and wide divergence within regions, a league table of global stock market performance so far in 2017 throws up a contrasting picture compared to previous years.
Turkish stocks, beaten down last year over political risks, are the world's best performing major market in U.S. dollar terms. Greek and Spanish stocks, which bore the brunt of concerns around the euro zone a few years ago, are meanwhile battling it out for top spot in Europe, according to BAML.
In terms of sectors, the weakness in tech and segments such as industrials, chemicals and capital goods, which are sensitive to the broad economic outlook, has led to a pick up in other, less favoured stocks.
Safe-haven sectors such as food and beverages or consumer staples, sometimes considered bond proxies because of their reliable, coupon-like dividend payments, are back in favour.
Procter & Gamble shares have rebounded nearly 5 percent over the past month, while in Europe shares of Unilever and Nestle are close to record highs and still comfortably outpacing the broader market's gains.
Those moves echo recent warnings by brokers including Morgan Stanley, Credit Suisse and JPMorgan on valuations on European cyclical stocks. They recommend investors look into buying dividend-yielding telecoms and real estate instead.
After a brief hiccup, financials stocks, often with large weightings across global markets, are back in favour.
In the United States, a combination of an expected pick-up in lending and lighter regulatory and compliance requirements have made the sector attractive, said Steve Chiavarone, a portfolio manager at Federated Investors in New York.
Worries that tighter Fed monetary policy might upset the optimism over equities are being set aside for now, with some saying a backdrop of healthy corporate earnings mean investors may view rising interest rates as a sign of a strong economy.
“We think as the Fed gets more active it’s going to throw gasoline on a fire and not a damp cloth,” Chiavarone said. (