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Investing.com -- A sharp divergence between U.S. and Asian equities since mid-February is likely to continue, according to Bernstein, which argued that the so-called "great rotation" out of U.S. stocks has staying power amid rising economic uncertainty and relative valuation advantages overseas.
So far this year, the S&P 500 is down 8.6%, while Japan and Asia ex-Japan though barely avoiding the red are up 0.7% and 0.3%, respectively.
Bernstein said this decoupling began when “U.S. exceptionalism got challenged” and has accelerated with growing tariff uncertainty and its impact on the dollar and bond yields.
Bernstein believes Asia will continue to outperform, with Japan, India, and Korea cited as the most attractive markets.
Recent fund flow data support the trend. While U.S. equities have still drawn the most inflows in 2024, the week of March 25 marked the first major shift out of U.S. stocks, with $20 billion flowing into Europe and $7 billion into Japan. A similar move occurred the week after April 9.
“Despite all the talks about the great rotation out of US, the amount of money that has gone into US equities is way ahead than what has gone into other regions,” analysts at Bernstein said.
Since 1989, there have been 12 periods where Asia ex-Japan outperformed the U.S. during drawdowns, typically lasting four months.
Japan saw similar divergences over five months. In those times, domestic-focused sectors and value stocks led performance, a pattern Bernstein expects to continue.
Asian markets also benefit from relative valuation and earnings advantages.
Bernstein noted that U.S. equities remain stretched on price-to-book at 3.9x, while Japan trades at 1.3x and forward price-to-earnings of 13x, near historical lows.
Japan is also in an earnings upgrade cycle, with consensus expecting 0.9% GDP growth this year, compared to expected declines of 0.8% for Asia ex-Japan and 0.9% for the U.S.
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