Three years ago, the predominant recommendation from investment strategists forecasting future trends was to be heavily invested in international equities, especially emerging markets and commodities, including precious metals. Since that time, the best game in town has been U.S.-based equities by a long shot, with commodities and emerging markets delivering negative returns. The chart below compares the S&P 500 Index to the MSCI EAFE Index of international markets and the MSCI Emerging Markets Index.
I shared a similar chart not too long ago, but the storyline has continued and has now gone to the point where it might make sense to start to look for a new chapter. Investors love to hop on trends, and we think it's a great idea. But those who hop on too late and don't have an exit strategy may find the story turns into a sad ending.
With the benefit of hindsight it's easy to see why the U.S. market has excelled. Although it wasn't obvious three years ago, we now know that the recovery is firmly in place following the financial crisis of 2008, with improvement in almost all segments of the economy. Further, the fiscal struggles in the Eurozone, which became apparent in 2011, still exist, although there now seems to be improvement in that situation.
Remember, rallies in asset classes tend to begin when the consensus opinion is negative. Right now there is a lower expectation for returns in international and emerging markets since the momentum is currently behind the U.S. This may continue for a while longer, potentially a year or more. But at some point the valuation differences will be so compelling that we expect international and emerging markets equities to start to outperform their U.S. counterparts.
I think it makes sense to make sure you have at least some moderate exposure to international equities at the present time and watch carefully for opportunities to add to that position as time goes on. The most compelling part of this story, in my opinion, is the emerging market segment of the international stocks.
It is in the emerging markets where we find the cheapest equities based on traditional measures, like price to earnings ratios and dividend yields. But at the moment, the opposite of the trend in the U.S. and broad based international equities. When that trend changes, it could be quite powerful and a good profit opportunity.
As always, I recommend maintaining a diversified portfolio appropriate for your personal situation. The most important part of this process is to include additional asset classes other than equities if you are not able to assume the fluctuation risk that is inherent with investing in stocks.
Good luck and good investing.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.