Content provided by Paula Wieck, CFA, Portfolio Manager
At CLS, we are constantly reviewing all asset classes for changes in the market environment. We monitor relative valuations, technical and behavioral indicators (such as moving averages and investor sentiment), quality fundamentals, macroeconomic data, and quantitative data such as various risk metrics, costs, and so forth.
Although the Portfolio Management Team wears many hats, one of the hats I focus on (as well as a handful of others on the team) is international developments. Here are some of our recent thoughts pertaining to international movement within portfolios.
The U.S. still looks expensive, trading at a 12% premium relative to the rest of the world.
Our valuation composite is comprised of price-to-earnings, price-to-sales, price-to-book, and price-to-cash flow. We review this valuation composite of every asset class relative to some benchmark. When reviewing international positioning, it makes sense to review these countries and regions relative to the world. The top gold line represents one standard deviation higher than the historical average (red line), while the bottom yellow line represents one standard deviation lower than the historical average. In looking at the U.S. chart relative to the rest of the world, the U.S. stock market still looks expensive.
Let’s take a closer look at broad regions around the world.
Emerging markets are still trading at a discount, as the current valuation is slightly below its historical average, however the discount isn’t quite as attractive as it was a year ago. This should be no surprise, as emerging markets have had a great run year-to-date, returning over 30% on average. Our emphasis in emerging markets has boded well for performance as of late, and we will continue to hold this positioning for the time being.
Developed markets look more attractive than they have in a long time, trading well below one standard deviation below their historical averages.
Next, we take a deeper dive within developed markets.
Europe is trading at a 4% discount.
Japan doesn’t look bad, trading at a 5% discount relative to the rest of the world.
The Pacific region (which excludes Japan) is trading at a whopping 21% relative discount to the rest of the world! The bulk of this broader region is about 55% Australia, 26% Hong Kong, and 10% Singapore, among smaller allocations to other countries.
Canada looks attractive as well – trading at a 15% relative discount!
Then there’s the United Kingdom, also trading at a 15% discount.
So, you may have guessed that our focus will be finding the most attractive ways to add exposure to the Pacific, United Kingdom, and Canada. Low relative valuations have historically been a strong predictor of higher future returns, but not necessarily a timing tool. As we look to potentially make these shifts in portfolios, we’re not doing so for a short time period (or tactically), but will anticipate holding these positions until either they are no longer attractively valued or a more attractive opportunity presents itself in the marketplace. We will continue to monitor sentiment and technical indicators to further guide us as to the timing of these trades, all the while keeping the overall desired factor exposures to quality and value in check, as well as the overall risk of portfolios.