Capital Group: Pull Back Presents Unique Equities Investment Opportunity
There is an opportunity for investors to load on equities after three months of pullback from this year’s highs. Those are sentiments echoed by strategists at Capital Group in the aftermath of the US Federal Reserve pausing on interest rates for the second consecutive time. According to Andy Budden as the $2.3 trillion manager, the time might be ripe to scan for opportunities in the equity market as central banks peak on monetary policy tightening.
Equity Bounce Back
The sentiments come against the backdrop of the tech-heavy index NASDAQ pulling back by about 7% from its all-time highs over the past three months. The S&P 500 is also down by about 9% from its peak in what is being interpreted as a small correction after a blockbuster rally in the first half of the year. In recent weeks, optimism has been streaming into the market as investors look for bargains following the correction.
Renewed confidence in equities comes from the Fed keeping interest rates in the range of 5.25% and 5.5% at its latest meeting. It also comes on the central bank’s indication that economic activity expanded at a strong pace in the third quarter, averting growing concerns about a potential slowdown amid the high-interest rate environment. Reports that the economy is growing at a solid pace should continue to fuel demand for risk in the market, of which equities are likely to be one of the beneficiaries after the recent correction.
A recent yield spike heightens the prospects of the Fed going slow on rate hikes at its December meeting. That’s because tighter financial conditions have succeeded in partially achieving the FedS goals, with inflation levels having dropped significantly. Stocks and bonds are likely to continue edging higher on growing expectations that the Fed is nearing the end of its historic tightening campaign.
improving Equities Outlook
Strategists at Capital Group believe now could be the best time for investors to start acting, given the divergence between asset classes and cash, fixed income and equities after interest rates peaked. If history is anything to go by, global equities will likely return more than 12% on average on dollar terms over the next 12 months if the Fed hike cycle has peaked.
With record $5.6 trillion cash on the side-lines, the equity market could be in for another leg higher as investors note the depressed valuations in various counters after the deep pullback. Faster-growing dividend-paying companies could be the biggest beneficiaries of the expected investment spree as they have been duly punished amid the Fed hike cycle.
Even as strategists at Capital Group remain bullish about the market outlook after the recent bounce back, analysts at Morgan Stanley are sceptical. Michael Wilson has warned against investing in US equities given the narrow market breadth and fading consumer and business confidence. Named one of the best portfolio strategists by an institutional investor survey, Wilson maintains that the prospects of a fourth-quarter rally have dropped significantly.
Wilson’s bearish sentiments are being fuelled by the expected negative impact of higher for longer interest rates. Falling earnings revision has only fueled scepticism about the overall market outlook.
