Many investors are wondering how recent developments in global markets might affect their portfolios and asking about possible allocations to international assets that may leave them better positioned in the current environment.
From our conversations with investors and advisors, we have found that 11 key questions are commonly asked. Three of these questions – and our answers – are:
A: Admittedly, it’s difficult to answer that question without knowing a number of things about an investor, including his or her risk tolerance, goals, life stage, and planned retirement date.
That said, we have a simply way of determining whether you own enough international stocks. In our Equity Strategy Playbook, the U.S. Macro and Market Snapshot reveals the weight of the MSCI USA Index in the MSCI All Country World Index (ACWI).
Specifically, U.S. equities represent 53% of the global equity benchmark, which means that international stocks capture 47% of the worldwide stock market. Many investors are surprised to see that non-U.S. equities represent almost half of a passively indexed global equity portfolio. Moreover, what they thought was a generous allocation to international stocks – typically 25% -- is far below the planetary benchmark.
The reality is that anything less than a 47% allocation to international stocks in equity portfolios represent a significant underweight position in the asset class
A: No, we don’t think it’s too late to get into EM stocks. After more than two years of significant outperformance, EM equities experienced a challenging second quarter of 2018. However, we think that the fundamental thesis hasn’t changed (namely attractive valuations coupled with strong economic growth) and short-term weakness could prove to be a buying opportunity for long-term investors.
Judging by the length (in years) and magnitude (in excess returns) of past EM regimes, it seems that the wave of outperformance that began in January 2016, remains intact and is in its early stages. Historically speaking, we’re two years into EM cycles that have lasted nine years on average. If past is prologue, EM stocks could have another seven years to run.
A: When EM equity valuations become stretched relative to their Developed Market (DM) counterparts, but we’re nowhere near those extremes. In fact, we’re on the other end of the spectrum, meaning that relative EM equity valuations are below their average since 1995.
What marked the end of the last 12-year EM equity outperformance regime? It was rich valuations, or when the relative EM P/S ratio breached the +1 standard deviation threshold, coupled with a contraction in global business activity.
However, we presently lack both of those conditions. The bottom line is that there’s plenty of value remaining in EM stocks, providing what we see as a long runway for investors in the years ahead.
Be sure to read the full 11 Pressing Questions from Investors to see all the questions and our responses.
Related Video: Answers to Investors' Pressing Questions
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