Ray Dalio, the manager of the world’s biggest hedge fund, reversed his long-held positive view of the US market this week, warning conflicts in President Trump’s administration could seriously damage the American economy.
With many UK fund managers holding large investments in US companies and the performance of the Footsie being heavily influenced by American markets, should savers start worrying about the safety of their cash?
Despite previously talking up Trump’s economic impact, Dalio said his £120bn Bridgewater fund has now turned defensive in America because current White House conflicts were unlikely to be handled with care.
‘Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation,’ he said.
Dalio is not the only big name to change tack on the US. Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn are both said to have bought protection against volatility in the US market recently.
What’s more, US equity funds have suffered nine straight weeks of outflows, with savers pulling a total of £3bn.
They are worried that by failing to cut taxes and spend $1trillion on infrastructure, Trump will remove the forces that have driven US stocks to record highs since his election last November.
As advertising guru and chief executive of WPP Sir Martin Sorrell warned this week: ‘The limitations of the new administration seem to be jeopardising the anti-regulatory, infrastructure and tax reduction programme that was promised.’
With US and UK markets soaring to record highs at an alarmingly fast pace since the end of the financial crisis, as can be seen in the graph, fears that the bubble will burst have been around for years now.
But with US interest rates now starting to normalise, experts are worried that any economic risk could lead valuations – the difference between a company’s price and its earnings – to finally snap after years of being stretched.
Paul Flood, fund manager at Newton Investment Management, said: ‘While stock valuations are a cause for concern, they are being supported by ultra-low interest rates and a stable economic backdrop.
‘However, should interest rates rise back up to more normalised levels or should economic data deteriorate, it would be difficult to justify the valuations we are currently seeing.’
Such worries have also led Marcus Brookes, head of multi-manager at Schroders, to cut his US investment in the country to its lowest ever level.
‘The average US bull market since the Second World War rises 163 per cent over a period of 64 months. This bull market is already up over 300 per cent over 98 months,’ he said. Likewise, James Sullivan, fund manager at Coram, said: ‘The correlation of the Fed’s monetary support and the US stock market is extreme.’
H E added: ‘We are concerned that if the Fed continues to take such a hawkish stance, then shares could fall in price. It is not a ridiculously expensive market, but in our opinion the risks outweigh the upside.’
And with the highly internationally-focused FTSE 100 soaring since Brexit due to the weak pound increasing the value of overseas investments, Sullivan said weakness in markets like the United States could also hit the UK.
‘If overseas consumption of goods made by FTSE 100 companies falls below expectations this would have a seriously adverse effect on the current valuation of the UK market,’ he said.
‘The UK has already seen a small number of stocks disappoint year-to-date, resulting in big price falls. These falls are often exaggerated when the starting valuation is already optimistic and expensive.’
Similarly, James Thompson, a fund manager at Rathbones, points to the old adage that says ‘When the US sneezes, the UK catches a cold’.
He has cut UK investments in his fund from 25 per cent to 7 per cent since last June’s Brexit result.
But Chris Beauchamp, chief analyst at IG, said it could be worth capitalising on other investors’ wariness of the UK market, adding: ‘Recent surveys of fund managers indicate that the FTSE is one of the least crowded trades, and “being greedy when others are fearful” could apply here.