Money managers are doubling down on stocks after a brutal October selloff, as cheaper valuations and the potential for continued profit gains help support a rebound among equities.
Group AG said Thursday it was increasing its exposure to stocks, including in the U.S. and emerging markets, while asset-management giant
BMO Global Asset Management and QMA, the $128 billion quant-equity arm of PGIM,
investment-management business, all recently reiterated their preference for stocks.
The pronouncements come as many investors are still trying to determine where major indexes are headed after stocks around the world lost about $4.5 trillion in value last month. For many, the selloff was swift and jarring as companies were in the midst of reporting another quarter of robust profit growth.
But cheaper valuations and expectations that profits will continue to grow in 2019, even without the benefit of a massive corporate tax cut, have supported asset managers’ moves to increase exposure to stocks.
The outlook has contributed the S&P 500’s 3.5% gain so far in November, bringing the broad index up nearly 5% for the year as it continues to work on recouping its October losses.
“Although we are mindful of the potential risks of adding to stocks against such a backdrop, we believe the scale of the selloff has been disproportionate,” UBS’s investment strategists wrote in their note, saying they would increase exposure to stocks after paring back their position in July.
“Even if we use our own relatively cautious estimates on earnings for 2019, which include the expected impact of tariffs in the U.S. and Asia and a modest slowdown in headline economic growth, valuations still look favorable,” the bank added.
The S&P 500 is trading near its lowest average valuation of the year. The broad index is currently trading at 16 times forward earnings, down from 17 times at the end of the September, according to FactSet. Meanwhile, the risk premium among U.S. shares stands at 4.6%, above the long-term average of 3.2%, UBS added.
“With solid corp earnings, valuations have become more attractive given the selloff over the last month, removing a potential headwind,” said Jon Adams, an investment strategist at BMO, which is overweight U.S. equities.
In emerging markets, equities are now trading at 11 times future earnings, a discount to the 30-year average of 13 times, according to UBS. European stocks are trading at 12 times future earnings, versus a long-term average of 16 times.
Still, analysts warn that the recent turbulence among stocks is likely to continue. Trade negotiations are ongoing and investors expect further volatility ahead of and during the Group of 20 summit later this month in Argentina, where President Trump and Chinese President Xi Jinping are expected to meet.
Expectations for political gridlock in the U.S. with a divided Congress could also send shockwaves through the stock market in the near term, several analysts said.
Despite those issues, UBS said “the value offered by global stocks justifies tolerating the potential for higher volatility, and we expect markets to move higher.”
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Write to Michael Wursthorn at Michael.Wursthorn@wsj.com