Cash is the safest place - AMP Capital signals slide in US stocks
The head of asset allocation at AMP Capital Investors, Nader Naeimi, is reducing equity holdings for the first time since 2011 as he sees the paring of US Federal Reserve stimulus driving a 10 per cent slump in US stocks by the end of the year.
Shares had risen too far, too fast as the Fed prepared to cut the $US85 billion a month asset purchase program that helped the S&P 500 index reach a record high this month, Mr Naeimi said.
Uncertainty before the German elections next month and about who will replace Fed chairman Ben Bernanke would also drag on global equities, he added.
"Cash is the safest place right now," Mr Naeimi said. "We're expecting a pullback much bigger than pullbacks we have experienced so far since 2012."
The US central bank's plan to reduce its record stimulus program is whipsawing stocks, bonds and commodities.
The S&P 500, which has gained 17 per cent this year, was likely to sink at least 10 per cent by December 31, said Mr Naeimi, who correctly predicted an 18 per cent correction in Japan's Topix index that began in May.
AMP's Dynamic Asset Allocation Fund, which manages money for institutional clients, had reduced shares in favour of cash. The allocation changes affect more than $50 billion of AMP's diversified funds.
The funds now hold less Australian and emerging-market equities than the benchmarks they track, while owning more Japanese and European shares.
Mr Naeimi has taken a neutral stand towards US stocks and has cut high-yield bond holdings to zero. "The transition from liquidity-driven strength to fundamental-driven gains is often marked by increased volatility and price weakness," he said. Shares might advance on good data once the transition period is over.
Mr Naeimi said he pared equity investments in early 2011 before the European debt crisis began roiling markets. He started adding to holdings at the end of that year after investor sentiments moved to pessimistic extremes and increased his allocation every time equities slipped until June. This time is different.
"The risk-return reward is no longer as good as it used to be," Mr Naeimi said. "I don't see much valuation buffer - it's not as cheap as it was a year ago."