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Asset managers are increasingly choosing to diversify their portfolios away from US stocks, despite Wall Street’s pronounced rally, as fears over being overexposed to secular markets grows. US markets saw a significant bounce back in recent months, shaking off the lows that followed Trump’s tariff announcement in April, with investors not yet losing their appetite for the region or its listed companies. US equities hit a string of record highs, buoyed by strong company earnings luring retail investors away from international rivals. The tech heavy Nasdaq has surged 50 per cent from its April slump, boosting its year to date gains to 19 per cent, closing at $237.46 (£177.66) on Monday, while the S&P 500 closed at $6,875.16. But asset managers are seeking to balance their US exposure with investments in other markets and commodities, in order to deal with concerns over the longevity of the US’s rally. Mark Prescett, senior portfolio manager at Morningstar, said: “In the US…earnings growth has been very strong, but you’re starting to see some cracks on the horizon.” “The US has been pretty much the only game in town for the last decade. “Now there are clear risks within the US markets that perhaps weren’t there before.” The dangers of tech concentration Among the worries that have sent asset managers fleeing to new investment opportunities, is the region’s hefty allocation to the tech and AI sector, prohibiting portfolios from diversifying on Wall Street. The US accounts for roughly 60 to 70 per cent of the global index, with the ‘Magnificent Seven’ stocks, which include tech giant Apple and Google’s parent company Alphabet, dominating the market. The significant tech allocation could put “investors at risk” according to some industry figures, as talk over the AI bubble being near to bursting continues to circulate. Similar to the dot com bubble in the 1990s, asset managers fear that investors could experience considerable losses while the wider market crashes or launches into a recession. Firms are looking to shake off their dependency on tech stocks by becoming overweight in more diverse markets. This includes Europe and Japan, whose markets are balanced with a number of different sectors, removing significant risks in portfolio allocations. Nina Stanojevic, senior financial planner at St James’s Place, said: “From a diversification point of view, going out of the US helps us to be exposed to other sectors and other industries that also diversify away from that tech theme.” High valuations US corporate valuations have rocketed in recent years, relative to both its own historical standards and other global markets. That has sparked fears over the increased risk of overpaying for the value, coupled with the potential for weaker returns and less room for growth if an investment does not meet expectations. Analysts predict that the US stock market’s upward trajectory is set to continue, causing asset managers to twist to undervalued regions which offer lower, attractive valuations. That includes the UK, due to its low exposure to the tech sector which accounts for just 1 per cent of the market. London’s index also offers wider exposure to sectors which are known for providing stable, profitable returns, such as the financial services sectors, and are able to avoid wider economic uncertainty. Asset management firm Royal London are among those bolstering their UK exposure, and sold some of its US allocation over the summer due to valuation worries. Trevor Greetham, portfolio manager at Royal London, said: “The US is priced at a level where it doesn’t feel sensible from a long term point of view to have loads of exposure. “As these companies get more and more expensive, you put more and more money into them, and your diversification is going down.” While they maintained roughly the same 50 per cent allocation as earlier in the year, which is significantly lower than the global benchmark of 80 per cent, Greetham acknowledged the firm would further reduce their allocation if their view on the market changed again. Gold and Asia While firms are focusing on becoming overweight in other markets, they are also changing their position on commodities, allowing clients increased diversification beyond stocks and bonds. Commodities, such as gold and silver, provide investors with a hedge against inflation, granting protection from macroeconomic issues. Investors have been increasingly flocking to gold, which hit a record high of $4,379.13 a few weeks ago, fuelled by the aftershocks of Trump’s tariffs and more recently the economic unease caused by the government shutdown in Washington, which has dragged on for nearly a month. Meanwhile, some portfolio managers acknowledged that many investors are unwilling to give up on tech stocks, preferring to take the chance of a popped bubble than reduce their holding. This has led some firms to look towards emerging markets in Asia, which offer an attractive tech investment opportunity detached from America, including Taiwan which is a major manufacturer of semiconductors, and Japan which is home to tech giant Soft Bank. However, some are turning towards Korea, where equities are up 45 per cent this year to date, trading at 4,042.83 KRW (£2.12). Korean tech stocks trade at approximately half-discut to the US, offering investors a way to tap into the tech market without as much risk, which Preskett believes more investors are taking note of. Preskett said: “In Korea, you can gain access to two of the three makers of HBM chips, SK Hynix and Samsung. “Their product is used in a fast growing market. So, I think that investors are waking up to the idea that they can tap into the AI boom.”
