Topic Tags: International Equity - Developed

How Will Tax Reform Impact Asset Class Returns?

On December 20, 2017, Congress passed the final version of the Tax Cut and Jobs Act (H.R. 1).  This tax reform bill is estimated to be a $1.5 trillion tax cut and represents the most significant reform to the U.S. tax code since the 1986 tax cut passed under President Reagan.  This newsletter will address the most important changes as it relates to the economy, markets, and our client portfolios.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice nor an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2017 Investment Symposium Briefing

A quick recap of the 2017 Investment Symposium — from CEO Brian Wrubel’s opening remarks to the keynotes and flash talks. This year’s symposium covered the current market environment, emerging investment themes and investment stewardship challenges in the year ahead. Our flash talk format is designed to brief clients on pressing topics and encourage timely conversations with investment consultants.

Full keynote and flash talk videos available on demand:

U.S. vs. Non-U.S. Equity Allocation: Does Parity Make Sense?


Flash talk by David Hernandez, CFA, at Marquette’s 2017 Investment Symposium

In this session, we cover U.S. vs. non-U.S. equity allocation. Starting with the basics in determining an equity allocation, we examine both the historical and projected risk/return analysis for U.S. and non-U.S. equity. What are different types of investors doing with their equity allocations? How does diversification improve the risk/return profile? Are we nearing the end of the U.S. outperformance cycle?

 

 

Will the Outperformance of Non-U.S. Equities Continue?

After several years of trailing the S&P 500, international equities are off to a strong start, returning 17.1% year-to-date through July. Is this the start of a longer term trend? This week’s chart examines the historical performance of the S&P 500 and the MSCI EAFE over the last thirty five years.

Since October 1982 the S&P 500 and MSCI EAFE have taken turns as the leader, each embarking on significant bullish runs. Between 2000 and 2007, international equities (7.2%) outperformed domestic stocks (1.4%). Then between 2007 and 2016, the S&P 500 beat the MSCI EAFE by over 7% on an annualized basis. The data shows that long periods of outperformance have been a common occurrence for both indices.

This year international equities have outperformed. They have benefitted from strong economic and earnings momentum, a clearer political landscape, and positive currency returns. All equities are expensive, but non-U.S. equities appear less expensive than their U.S. counterparts. While we cannot predict the future, the improved backdrop and relatively attractive valuations bode well for international equities.

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Encouraging Trends in Global PMI

Our chart of the week highlights the recent trend of expansionary PMI readings seen across major global economic areas. PMI, also known as the Purchasing Managers’ Index, is a monthly sentiment reading which provides information on current conditions within the manufacturing sector. A reading above 50 indicates that the manufacturing economy is expanding, while a reading below 50 points to contraction in manufacturing. PMI covers activity only within the manufacturing sector, but is considered a leading indicator since contractions in PMI have historically preceded recessions.

As seen in the chart above, an increase in the pace of manufacturing growth has taken place globally since the second half of 2016. Although readings in some regions show a slower short-term rate of change, PMI readings remain well within in the expansionary zone of above 50. Given that we are in one of the longest duration bull markets in history and equity valuations are at the upper end of their historical ranges, it is encouraging to see an improvement such as this in the global economic picture. The recent uptick in manufacturing growth may help to provide an added tailwind for the current economic expansion and bull market.

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2017 Market Preview

January 2017

Similar to past market preview newsletters, we enter the year with a new set of questions. What shape will Trump’s policies take and how will they impact the market? Will the formal start of the Brexit have an impact on portfolios? To what degree and pace will the Fed increase interest rates? These topics among many others are covered in the following articles as we offer our annual market preview newsletter. Each year presents new challenges to our clients, and other headlines will emerge as the year goes on; it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered. Recognizing that many of our clients may not have time to cover the following 30 pages of material, we offer the primary conclusions for each asset class heading into 2017.

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The Impact of Trump’s Victory on Capital Markets

November 2016

To the surprise of pollsters, analysts, and much of the American public, Republican presidential candidate Donald Trump trampled predictions by winning the presidential election in stunning fashion.

The long-term impact of Trump’s presidency on financial markets is impossible to predict at this point, given the amount of uncertainty around his expected policies. However, the short-term dynamics surrounding his election win are starting to emerge, and we share with you what we are seeing and hearing in the market in this newsletter.

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EM Growth Leads to Outperformance

After a tough 2015, emerging market (EM) equities have rebounded nicely, returning 16% through the first three quarters of the year. The asset class has benefitted from a change in the macro environment, including the stabilization and strength in commodities and currencies. Not surprisingly, GDP growth – particularly against developed countries – has started to accelerate and is expected to continue on its upward arc (shown by the blue line in the graph above).

After a tough 2015, emerging market (EM) equities have rebounded nicely, returning 16% through the first three quarters of the year. The asset class has benefitted from a change in the macro environment, including the stabilization and strength in commodities and currencies. Not surprisingly, GDP growth — particularly against developed countries — has started to accelerate and is expected to continue on its upward arc (shown by the blue line in the graph above).

The investment case for EM has always centered on growth and diversification. Investors look to capitalize on favorable demographics, urbanization trends, and expansion of the middle class across EM countries. EM equity’s performance versus developed markets (DM) follows closely with the difference in GDP growth between EM and DM. From 2000 to 2009 the differential grew from 1.7% to 6.3%, and outperformance followed. Since 2009 this gap has narrowed significantly, falling to 1.9% in 2015. DM largely outperformed during this time period. Looking forward, however, the IMF estimates the growth differential to widen beginning this year. This has furthered strengthened investor sentiment on the asset class and could be the start of a strong run for emerging market equities.

Equity Returns Post Brexit

The United Kingdom’s (UK) vote to leave the European Union on June 23 was an unprecedented event that impacted markets across around the world. While this exit won’t actually take place for another two years, equities sold off in a knee-jerk fashion as investors feared the ramifications on the global economy. Due to the heavy exposure to Europe, non-U.S. developed markets suffered the most, losing nearly 10% before rebounding.

The United Kingdom’s vote to leave the European Union on June 23rd was an unprecedented event that impacted markets around the world. While this exit won’t actually take place for another two years, equities sold off in a knee-jerk fashion as investors feared the ramifications on the global economy. Due to the heavy exposure to Europe, non-U.S. developed markets suffered the most, losing nearly 10% before rebounding.

With the U.S. viewed as a safe haven, domestic equities have fared relatively well in the Brexit aftermath. The U.S. dollar appreciated following the decision while the British pound slumped to a 30 year low against the greenback. Emerging market (EM) currencies have also depreciated against the dollar however EM equities have been one of the stronger performers. This asset class has benefitted from the U.S. Federal Reserve indicating it will not make any significant interest rate movements due to the risk the Brexit poses to the economy. Only a few days after the UK vote, EM equities rallied for its biggest weekly gain since March. While the Brexit will undoubtedly have long-term ramifications, many of which are currently unclear, equity markets have rebounded from the initial sell-off.

BREXIT: The Results and What’s Next

June 2016

On June 23rd, the United Kingdom (UK) shocked markets with its vote to leave the European Union (EU). The Remain vote lost to the Leave vote, 48.1% to 51.9%, with a strong turnout throughout the UK. Younger voters sided with the Remain camp by a wide margin, while older voters supported the Leave camp (Exhibit 2). In the weeks leading up to the referendum, global equity/credit markets and the British pound experienced positive price movement in anticipation of a Remain verdict. Using polling information and odds makers as indicators, investors were caught off guard at the Brexit result, leading to dramatic losses for risk assets on June 24th.

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