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Wasif Latif, Head of Global Multi-Assets.jpgBy Wasif Latif, Head of Global Multi-Assets

Since early March 2009, the best answer for equity investors in terms of total return has been U.S. large caps – the Standard & Poor’s 500  is up more than 300% since the post-financial crisis bottom. Nowadays, however, that answer is being called into question.

 

A big part of the reason for the relative outperformance of U.S. stocks, particularly over the past five years, is that other stock markets have struggled to gain and then maintain momentum. This is the root of the “there is no alternative” rationale used by many asset managers to explain why they’ve been willing to pay ever-higher prices for that same dollar of S&P 500 earnings.

 

But we feel like there’s a transition in the making as international stocks start to shine – both developed markets (especially Europe) and emerging markets are producing better economic data and corporate results.

 

In 2017, European and EM stocks, each with total returns of 17% through May, are significantly outpacing U.S. stocks (+9%). And because those asset classes have not enjoyed the same sort of multi-year returns as U.S. equities, their relative undervaluation compared to U.S. stocks enhances their appeal. Investors looking for the next big opportunity are now piling in to take advantage of the opportunity.

 

As long-term investors, we were early to this trade in our asset allocation portfolios – we have been overweight DM and EM stocks for several years in anticipation that the rest of the world would get back on track and the performance gap between U.S. and global markets would narrow. The recovery under way now has taken a lot longer than we expected to materialize, but as a result of our focus on relative valuation, we hung in and waited for the market to come to us.

 

International stock rallies have been known to last for years, so once we were confident that conditions were shaping up, we swapped expensive assets for cheap ones by trimming our allocation to U.S. stocks and adding to our overweight global equities.

 

As members, you have your own asset allocations to manage. There are, of course, a lot of individual factors that figure into each investor’s decision-making – these include risk tolerance, time horizon and cash flow needs. On the risk side, we would suggest you ponder a couple of basic questions that may help you with your equity positioning.

 

Are you diversified enough? There’s an old and often-repeated adage, “Invest in what you know.” U.S. investors know U.S. companies, so they tend to concentrate their equity allocation in the domestic market. This so-called “home bias” is not unique to Americans, but it can affect both risk and return.

 

On the return side, there’s an opportunity cost – the U.S. stock market accounts for less than 40% of the global stock market, so not looking outside the national borders means less chance to share in potentially the vast amounts of wealth being created in dynamic economies around the world. On the risk side, U.S. stocks have soared since 2009 to valuations we believe are well above their long-term average by any measure. As a result, U.S.-centric investors may have too much of their wealth exposed in the event of a market drop.

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Are you prepared for a volatility upswing? The U.S. stock market has been unusually placid for some time now – up days or down days of more than 1% have become such rare happenings that they make for big headlines when they do occur. International markets are also calm in terms of daily price swings.

 

But just because markets have been docile doesn’t mean they’re going to stay that way. We believe investors should be prepared for more volatility – rich valuations for U.S. stocks make them especially vulnerable. At the same time, we caution members investing for the long term to not overreact in the event of a short-term event that roils markets. What looks earth-shaking over a day or even a week often smoothes out over time. 

 

As we come into mid-year, and with the possibility that a major global equity shift is under way, now might be a good time to take stock of where your portfolio stands. We encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles may be suited to you based upon your individual goals, risk tolerance and time horizon.

 

Investing in securities products involves risk, including possible loss of principal.

This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisors. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, but not necessarily those of AMCO, IMCO or any affiliates as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO does not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.

Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.

Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.

Standard & Poor’s 500 Index and S&P are registered trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.  S&P 500 is a trademark of the McGraw-Hill Companies, Inc.

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment advisor and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

 

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