LONDON (Reuters) - Investors should cut their exposure to “complacent” stock markets, French bank Societe Generale said Thursday, warning that high valuations and the approaching end to ultra-loose monetary policies were a cause for concern.
“We are worried by the combination of complacency, valuation and simultaneous tightening by the Fed and the ECB,” analysts at the bank wrote in a research note, just as three major Wall Street equity indexes posted record closes for the second consecutive session.
The bank downgraded equities to ‘neutral’ from ‘overweight’, cutting its allocation in its multi-asset portfolio from 60 percent to 50 percent.
“We believe it is the right time, when markets look at the blue sky with sunglasses and when the trend and carry is your friend, to recommend downgrading risk assets,” the SocGen analysts wrote, advising a shift to cash and government bonds.
Alain Bokobza, head of global asset allocation at SocGen, told Reuters that U.S. equities looked particularly expensive when measured using U.S. economist Robert Shiller’s cyclically adjusted price to earnings ratio (PE).
“We are at 30.6 and there are two periods during which the PE ratio was equal or superior. It was in 1929 (the year of the Wall Street Crash) and the period that preceded the burst of the dotcom bubble (in 2000),” he said, adding his team had cut the weighting of U.S. shares in its portfolio.
“That does not mean that tomorrow morning everything will fall down,” Bokobza stressed, specifying that his message was to turn down risk exposure by one notch rather than to prepare for a financial meltdown.
NO ‘BEAR’ OR ‘BULL’ CONSENSUS
SocGen said investor complacency extended into their views of monetary policy, with some betting the Federal Reserve will not raise U.S. interest rates before the end of 2017 and that the European Central Bank will start tempering its stimulus package only slowly.
“The markets are pushing back on what is actually quite a clear message from central banks that don’t want to see a repeat of the errors made in the past,” the analysts wrote, saying the bank would not make the mistake of “staying behind the curve unnecessarily for too long”.
Bokobza pointed out that the Bank of England policymakers had strengthened their tone on Thursday.
Britain’s FTSE 100 index lost up to 0.6 percent after the pound jumped by over a cent against the dollar as the Bank of England warned interest rates were likely to rise for the first time in more than a decade in the “coming months”.
There is no “bear” or “bull” consensus yet among brokers on the direction markets are likely to take.
Cross-asset analysts at UBS say for instance that although the strong global equity rally makes it tempting to take profits, there could be a significant opportunity cost to exiting equities or buying expensive hedges. They are recommending investors stay ‘overweight’ equities.
Reporting by Julien Ponthus,; Editing by Helen Reid and Catherine Evans