Investors to remain cautious of striking right valuation balance: Amundi

European investment manager, Amundi, has warned investors to tread carefully when striking the balance between high valuations and strong earnings as the market continues to anticipate the next policy moves from global central banks.

New analysis from the investment manager found that markets are “optimistically interpreting the latest policy action” from the US Federal Reserve (US Fed) to cut interest rates by 50 basis points. However, Amundi also did not discount the potential for “apprehensions on the economic front”.

“A Fed that is inclined to cut rates deeper would give more leeway to the ECB and the Bank of England to reduce their own policy rates. Higher number of Fed rate cuts means lower terminal rates for the Fed, with ripple effects on the ECB and BoE,” Vincent Mortier, Group CIO and Monica Defend, Head of Amundi Investment Institute, said.

“The US seems less  concerned (for now) about fiscal deficits. The political leanings of Kamala Harris and Donald Trump are different, but neither of them seems to be bothered by high deficits. In Europe, it’s the opposite, and has caused investment and productivity gaps with the US over the years.

“China’s monetary stimulus is a definite boost to market sentiment. The monetary easing and changes to housing policy signal a renewed effort by the country to support the economy, but we await clarity on fiscal stimulus.”

The analysis also suggested that “quality businesses with robust fundamentals” present opportunities for investors to resist market tensions.

“Weakening data coming from the US is consistent with a soft landing but any probability of a worsening environment is not priced in by the markets. With this slowing economy, it is difficult to see margin expansion and we believe earnings forecasts are likely to come down,” Barry Glavin, Head of Equity Platform, Yerlan Syzdykov, Global Head of Emerging Markets and Marco Pirondini, CIO of US Investment Management, said.

“On the other hand, some companies are generating strong cash flows and that has been supportive of share buybacks, which are supporting markets particularly in the US, and boosting positive sentiment. In the medium term, however, these high valuations do not form a strong basis of sustainable returns.

“As a result, we explore segments where earnings assumptions, pricing power and dividend prospects are robust but believe investors should be careful not to overpay. We see such businesses in Europe, Japan and EM.”