A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week
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February 23, 2015

Is swing in the air?
Relative performance: MSCI USA, MSCI EM and MSCI EAFE indexes

chart

Source: Bloomberg, as of 2/17/2015. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Not too long ago, "going globa" was a much-heard mantra, urging US investors—who've historically tended to focus on domestic opportunities—to diversify abroad.
  • Yet more recently sentiment has swung back toward the US—hardly surprising given how much the US has outperformed other regions over the last three years.
  • That's a switch from the previous decade, when many global sectors generally bested the US with respect to investment returns. That outperformance carried on long enough for "going global" to gain traction with an ever widening audience.
  • In retrospect, it was during that period of underperformance that US assets may have offered the greatest potential relative value, although it would take several few years for the benefits in terms of total return to be realized
  • That's a lesson to remember given the pessimism surrounding Europe, Japan, China and other emerging markets. Indeed, growth expectations declined last year and structural hurdles to improvement (laws, debt levels, demographics) remain daunting. .
  • That pessimism has hurt valuations in these regions. But where valuations are low and expectations depressed, attractive opportunities could be found with discipline and patience to wait for market sentiment to swing back toward optimism.
  • No one can know for sure when , such a swing might occur, but it's worth noting that over the past five years US equities have outperformed international shares by the widest cumulative amount since 1972¹ – begging the question how much further can the pendulum swing before it reaches the apogee of this latest oscillation…or whether it has already?

The chart:

  • The chart shows the relative price performance of the MSCI USA, MSCI EM and MSCI EAFE indexes from February 28, 2015 through February 17, 2015.
  • Index values were reset to 100 on February 28, 2012.
  • The price of the MSCI USA has increased nearly 54% over the past three years compared to less than 18% for the MSCI EAFE and a loss of nearly 9% for the MSCI EM

¹ Source: ClearBridge Investors, "It Don't Mean a Thing If It Ain't Got That Swing", by Paul Ehrlichman, January 2015.


Definitions:

Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The MSCI USA Index is designed to broadly and fairly represent the full diversity of business activities in the United States.  Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The MSCI EAFE Index is an unmanaged index of equity securities from developed countries in Western Europe, the Far East, and Australasia.


IMPORTANT INFORMATION:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Equity securities are subject to price fluctuation and possible loss of principal.

Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Outperformance does not imply positive results.

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