We remain fans of diversification, including geographic diversification for suitable equity portfolios. Sticking with that approach has been trying in recent years, however.
As shown in the LPL Chart of the Day, Struggles for International Stocks Continue (Above), stocks in developed foreign markets, represented by the MSCI EAFE Index, have trailed those in the United States significantly and consistently for the past decade. The story is the same for emerging market (EM) stocks.
We maintain developed international equity allocations in our strategic portfolios with long time horizons. At some point, the tide will turn. However, despite relatively attractive valuations, we see a number of challenges in developed markets that lead us to maintain our tactical underweight to the asset class.
“Our concerns about global policies, economic growth, and interest rates drive our cautious outlook for developed international equities,” said LPL Financial Chief Investment Strategist John Lynch. “Fiscal deficits, populism, and strained monetary initiatives could continue to weigh on economic activity in Europe. In addition, Japan’s VAT tax could pressure output this fall.”
Other factors driving our caution include ongoing Brexit uncertainty, a German economy on the cusp of recession, and difficult budget negotiations and an unsettled government coalition in Italy.
We recommend tactical investors consider focusing the majority of their equities allocations here at home as U.S. economic growth expectations have held up well compared with global trends. For international equity allocations, we prefer to focus in EM.
Despite tariffs and ongoing trade uncertainty, EM economies are expected to grow at roughly triple the pace of developed international economies in 2019 and 2020, according to Bloomberg consensus gross domestic product (GDP) forecasts. EM demographic trends are more favorable, and valuations are even more attractive than those in developed international markets. We see upside from a U.S.-China trade compromise in the coming months, although we acknowledge the increasing risk the conflict drags on well into 2020 and the weakening near-term earnings outlook.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC.
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