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Adding International Exposure for Diversification and Enhanced Returns

Mar 05, 2018

Over the last 12-months, investors who chose to focus their portfolio allocations on US stock markets have been proven to be smart. On a trailing 12-month basis, the Russell 2000 is up 10.0%, the S&P 500 is up 14.57%, and the Nasdaq Composite is up 26.29%. In any time period, these returns would be very good and they especially look compelling given the backdrop of political uncertainty, expensive valuations and a hawkish Federal Reserve last year. However, while these returns are very attractive, it is tough to ignore the returns of international equity markets, in particular aggregate Emerging Markets & China. At what point do investors start to appreciate the benefits from adding international exposure to their portfolios for not only diversification, but also for enhancing portfolio returns?

YTD, the Nasdaq Composite is up 6.57%, the S&P 500 is up 1.01%, while the Russell 2000 is down .07%.  In comparison, YTD, Chinese Large-Cap Equities (FXI) is up 2.36%, and has returned 25.37% on a trailing 12 month basis. Additionally, YTD, MSCI Emerging Markets ETF (EEM) is up 2.14% coupled with a 27.24% trailing 12-month return. Outside of the Nasdaq’s strong performance, which is not a truly diversified investment vehicle since it is comprised of US tech stocks, investors would have fared very well if they had allocated internationally in developing China or broad Emerging Markets. Valuations appear attractively priced for China and EM -  with a 12x Fwd 12M P/E ratio for EM & China. Earnings growth is north of 30% for both groups – in comparison to earnings growth being similar for US Indices despite having Fwd 12M P/E’s at 17x. The market appears to be over-discounting growth in aggregate EM & China. As a result, going forward investors may want to reconsider adding international exposure to their portfolios.

Prudent investors may want to consider how to best allocate international investments and Quantamize can help with its quantitative multi-factor framework, providing quantitative models covering Chinese, Mexican and Brazilian equity markets.