The US economy may be staging a Q2 rebound, suggests Valentijn van Nieuwenhuijzen, NN Investment Partners' Head of Multi Asset
NN Investment Partners has reduced its overweight in eurozone equities and raised its exposure to US equities. It believes US domestic income, labour market and consumer spending data point to the US economy staging a rebound in the second quarter.
He identifies the reasons for a rebound as, firstly, the macro-economy. Although the second estimate for Q1’s quarter-on-quarter growth was revised down to an annualised -0.7 percent, gross domestic income (wages, profits, rental income and interest) grew by an annualised 1.8 percent, raising questions on the extent to which Q1 GDP data represents the true underlying situation. Secondly, labour market evidence suggests a comeback, he says.
After the strong May payroll report, the three-month average gain now stands at 207,000 and the six-month gain is at 218,000. These numbers suggest the corporate sector remains in the mood to expand. Thirdly, consumer spending may be ready to bounce back.
Until April the momentum in retail sales remained very subdued but the May data as well as backward revisions now show a more positive picture, which suggests the consumer is waking up from a first-quarter hibernation. There is still a reservoir of wealth gains that have accumulated amid falling consumer debt levels. It should be only a matter of time before consumer spending rebounds.
“Greece is of course a source of volatility and reason enough to become more cautious but this is not our only motivation for reducing the overweight in Eurozone equities and adding to US equities,” he says. “Earnings momentum has deteriorated rapidly for Eurozone equities whereas in the US this indicator has stabilised.
“Better US economic data will of course feed into rate expectations. In the past, higher policy rates did not stop a rising market. Lower valuation ratios were compensated by an improving earnings outlook. This time may be different. We do not expect a lot of US earnings growth, given the already elevated level of net profit margins (7.2 percent), a stronger USD and the lack of productivity growth. On top of this, the earnings cycle is in a much more advanced stage than in the Eurozone. US earnings are currently far above their long-term growth trend whereas Eurozone earnings are far below theirs. These medium- to longer-term considerations prevent us from being even more positive on US equities for the time being,” he concludes.
