State Street's Olivia Engel finds more than 'crazy valuations' in the US


The Australian sharemarket looks “tough” while Wall Street is still a great place to invest despite some “crazy valuations”, Olivia Engel says.

The rising Aussie star in State Street Global Advisors’ ranks recently moved to the company’s headquarters in Boston, where she is preparing to take over the asset management giant’s global quantitative strategy team as its chief investment officer by the end of the year.

On a trip back to Sydney to pick up her family last week, Engel notes the deterioration in the local economy, which managed to eke out just 0.3 per cent growth in the first quarter.  

“Our economic cycle is really at odds with what else is going on in the world,” she says.

“We’re not showing the same signs of real earnings growth,” she says, adding that despite the sluggish macro environment local stocks aren’t cheap either.

Despite the growing local gloom, Engel would never throw in the towel and sell everything, she says in reference to the recent headline-grabbing decision by Altair Asset Management to shut its funds and return money to investors due to an “overvalued and dangerous time in the cycle”.

“I can’t imagine myself being in a situation where I’d need to do that. I actually think now is a great time for active management, because we have huge dispersion between the macro and the micro,” she says.

Still, while her team’s stock pickers don’t utterly avoid Australia, she clearly sees more opportunities in the US, with about 60 per cent of the $US30 billion she helps manage invested in American shares. 

Yes, the overall market in the US looks expensive after a bull run that is well into its ninth year, Engel concedes, but she adds that the actual company fundamentals are improving with earnings growth having picked up.

Based on indicators such as the price-earnings ratio, the benchmark S&P 500 index, which is trading at a PE of 25.7 times versus the long-term average of 15.7, seems highly priced.

“When you’ve been in five years of earnings malaise, then the market is just extrapolating these small shoots of earnings recovery into the future and getting ahead of where it expects earnings to end up,” she says.

Despite some “crazy valuations”, Engel reckons it’s still possible to find reasonably priced stocks, not least because of the sheer size and depth of the market. “You’ve got 150 tech companies that are bigger than $US5 billion,” she notes. 

And on a macro level the settings are also encouraging, she adds: capex is there, consumer sentiment is up, the economy is growing and the Federal Reserve doesn’t look like it’s standing in the way of that growth. 

“It’s really the political climate that’s the most uncertain thing. But maybe the market has decided that politics doesn’t matter that much anyway.”

If there’s a catalyst for a market correction, then it’s more likely to be an economic disappointment, such as a spike in unemployment, she says.

The US may trump Australia as a place for State Street to invest, but on a more personal note, does she have second thoughts about moving there?

Not at all, she says. “Workwise it’s great being at head office,” she says, praising the diversity, while Boston – where she recently bought a house – “is a really nice town”.

After having visited the city plenty of times over the years – prior to State Street she used to work for asset management group GMO, which is also based in Boston – she reckons she knows the city well, including where the good coffee shops are.

“There’s an Aussie guy who started a coffee business just across the road from our offices and he knows how to make a proper coffee.”

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