We have been asked many times over the past several years when, if ever, the period US equity outperformance vs. the rest of the world would finally come to an end. We typically responded that there were a lot of reasons to favor US equity, as we did in our portfolios. The opposite may now be true, and lagging performance of US equities year-to-date supports this thesis. If we are correct, we may be entering a multi-year period of international equity outperformance, and investors would do well to allocate to this tailwind.
First, in order to support a long-term period of out-performance of one equity market over another, the fundamentals must be in place. These exist in spades. Outside the US:
One can argue fundamentals until they’re blue in the face, but fundamentals don’t exert influence if shorter-term conditions are unfavorable. This has been the case for years: international equities have been plagued with myriad reasons for investors to avoid them. Poor economic growth, poor earnings growth, uncertain monetary policy, unstable political conditions, and countless other crises have served as scare factors. Meanwhile, the US has represented a bedrock of policy certainty and economic and earnings growth. But now the shoe is on the other foot. Economic and earnings growth have accelerated abroad while remaining weak in the US. Monetary policy in Europe and Japan will remain ultra-accommodative for years, while Janet Yellen’s replacement remains a question mark. And political stability looks set to return to Europe for the first time in years, just as political instability has arrived in the US. We have captured significant international equity outperformance year-to-date, and have positioned our portfolios to continue to do so.
Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.
*Some Emerging Markets allocation overlaps with regional allocations.
**Individual account allocations may differ slightly from model allocations.
^Excluding GTA’s 7% alternative and cash positions.
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