Favoring International Flavors

by:
Portfolio Strategist, MainStay Investments

Global growth has firmed, and a slew of new data last week confirmed that the expansion is both geographically broadening and gaining momentum. The robustness in global economic news is certainly supportive of equity markets, both in and outside of the United States.

With valuations elevated at home, however, it begs the question: Where is an investor to go?

The Strategic Asset Allocation & Solutions Group (SAS) looks for opportunities to generate alpha across value, sentiment, momentum, and the economic cycle. Using these indicators, international investments look particularly appealing today. Emerging markets currently offer both value and momentum, a rare combination (Figures 1 and 2). Additionally, strong global growth, rebounding commodity prices, and tepid inflation should remain drivers of emerging markets.

Figure 1: Emerging Markets Are Undervalued Relative to History and Developed Markets

Emerging Markets vs. Developed Markets: Equity Valuation (Forward P/E)

Sources: Thomson Reuters Datastream, New York Life Investments, as of 10/10/17.

Figure 2: Emerging Markets Experience Faster Earnings Growth

Source: Bloomberg, as of 10/10/17. S&P 500 is represented by the S&P 500 Index. Emerging Markets is represented by the MSCI Emerging Markets Index. Earnings momentum is the YoY% Change in 12-month forward earnings-per-share (EPS). Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.

A Secular Trade

While SAS currently endorses the tactical opportunity in emerging markets, they also highlighted the longer-term secular trend in play. The opening up of new markets, increasing levels of trade, high rates of investment, increasing urbanization, and technological innovation will likely foster rapid growth in emerging markets. Per some estimates, by 2050, emerging economies may dwarf their current developed economy counterparts. This is, in large part, due to the benefits of a growing middle class and lower levels of burdensome debt, when compared to developed markets.

Not All Emerging Markets Are Equal

Although emerging markets are similar in their promise of higher growth, they each offer unique opportunities and risks that investors should consider. Mexico, for example, has a high sensitivity to developed markets – namely America – and thus, is very reactive to economic events here in the States. Some countries, like Brazil or Russia, may be more sensitive to changes in commodity prices. Active management may be able to navigate these risks and opportunities to generate some value.

A Broader Risk to Our View

After hitting a 2017-low about a month ago, the U.S. dollar has rebounded sharply. A continued trend higher could pose a headwind to emerging markets. Rapid or sharp changes in the dollar tend to be disruptive effects on these emerging economies, as dollar-denominated debt becomes more burdensome and capital flows exert add economic pressures. Understanding the balance between the risks and rewards of each is an important investment consideration, and may also highlight the need for active management.

Trade protection would likely have similar effects. So, any renewal in protectionist rhetoric from the Trump administration could equally weigh on emerging market equities. Also important are the ongoing North American Free Trade Agreement (NAFTA) talks and the outcome of these negotiations in November and December which will set the precedent for the administration’s future trade policy. And again, in early 2018, President Trump could use Section 201 of the U.S. Trade Act to impose quotas on solar panels and washing machines, providing more anecdotal evidence for markets.

Parting Thoughts

The expansion in the U.S. is considerably more mature than in other parts of the world. Other regions have more unutilized capacity to feed further growth, which is especially true in emerging markets. With both momentum and value on its side, rising commodity prices and tepid global inflation should continue to benefit international investments.

 

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Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

This material is provided for educational purposes only and should not be construed as investment advice or an offer to sell or the solicitation of offers to buy any security. Opinions expressed herein are current opinions as of the date appearing in this material only.

Active management is an investment strategy involving ongoing buying and selling actions by the manager. Active managers purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees than passive management.

Alpha measures a fund’s risk-adjusted performance and is expressed as an annualized percentage.

Commodities are investments in instruments and companies that are susceptible to fluctuations in certain commodity markets. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S‐4 events, regulatory developments or other factors) could have an adverse impact on those companies.

Earnings-per-share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock.

The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 Emerging Markets (EM) countries. With 839 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI World Index captures large- and mid-cap representation across 23 Developed Markets (DM) countries. With 1,652 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

P/E Ratio (price‐to‐earnings) denotes the weighted average of all the P/Es of the securities in the fund’s portfolio.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

U.S. Trade Act (also referred to as the Trade Act of 1974) – Legislation passed by U.S. Congress to expand U.S. participation in international trade and reduce trade disputes. The act provided the authority to reduce or eliminate trade barriers, improve relationships with nonmarket (Communist) and developing economies, and change to injurious and unfair competition laws. The act also provided relief for American industries negatively affected by increased international trade and changed tariffs on imports from developing countries. Further, it provided for U.S. action against foreign countries whose import activities unfairly disadvantaged American labor and industry.

The Strategic Asset Allocation & Solutions Group is a division of New York Life Investment Management LLC. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for Strategic Asset Allocation and Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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