Travel bans don’t apply to global investing
U.S. equities have led a historic global rebound from March lows. But with COVID infection rates reaccelerating, and many states and municipalities delaying or reversing plans to reopen business, can U.S. markets retain their leadership role? We suspect not.
Global growth is on the mend…
Following business closures and stay-at-home orders, the staggered “reopening” of global economies appears to have fulfilled investor hopes that COVID-related economic damage would be short-lived. Consumers and businesses, flush with cash from generous fiscal transfers, generated the expected bounce in activity and re-ignited a historical rally in stock prices.
… while the U.S. rebound stalls.
The roll of policy — health, fiscal, and monetary — is to prevent the government-induced sudden stop from morphing into a protracted recession. So far, fiscal and monetary policy are in full support of this goal, but federal health policy has been less successful.
Constraints imposed may have been relaxed prematurely in some jurisdictions — both before community spread was contained and without sufficient priority placed on testing and tracing. This, coupled with disregard for other safety protocols (i.e. mask-wearing), has led to a reacceleration of infection rates across much of the U.S. — thereby reigniting the health care crisis and with it the economic crisis.
Already, high frequency data shows retail activity rolling over in some areas. So long as the virus remains loose within our communities, a portion of the population will continue to safely cocoon at home, inhibiting a full recovery.
Air Travel Slows
TSA Total Number of Passengers
Sources: New York Life Investments’ MAS team, TSA Traveler Data Department of Homeland Security, 7/21/20.
Dining Out Stalls
OpenTable Reservation %YoY
Sources: New York Life Investments’ MAS team, Open Table, 7/21/20.
Implications for investors: It’s time to go global
Investors willing to take on risk may want to consider global equities over a 12-month horizon. In our portfolios we are underweight equities, but believe the balance of risk and reward is more attractive outside of the U.S. equity markets.
We see the following reasons in support of going global:
Health Policy. Other Organization for Economic Co-operation and Development (OECD) nations have displayed more effective health policies, whereby initial lockdowns were more stringent — effectively curbing the contagion. Their reopenings have also been well managed, enabling increased mobility and activity without a renewed surge in cases.
Strong Social Safety Nets. Timely, aggressive, and well-designed fiscal policy support has also been a factor. This allowed many countries to mitigate the economic damage from the COVID crisis by providing income security, while maintaining existing relationships between workers and employers — even as the lockdowns choked off demand on a temporary basis. More broadly, the result has been a rapid and continuous improvement in business activity than has been observed within the U.S. to date.
Attractive Valuations. Foreign markets have also displayed a strong valuation advantage. U.S. large cap companies trade at $26.00 per dollar of next 12 months’ earnings, whereas international developed stocks trade at $20.80 per dollar of earnings (see chart below). International equities trading at this steep discount, while their economies are set to outpace the U.S., implies that now is a good time to consider favoring international equities over those listed domestically here in the U.S.
Valuations More Attractive Outside the U.S.
Current Price Relative to Forward 12-months Earnings Estimates
Sources: New York Life Investments MAS team, Bloomberg, 7/21/20. The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. The MSCI EAFE Index is an equity index, which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada.
A bet on improving global growth. The anticipated acceleration in aggregate demand, fueled in large measure by fiscal support, will be of particular benefit to more cyclical sectors. International markets tend to be more manufacturing-based and export-driven, positioning them to potentially outperform in any cyclical upswing.
Managing currency volatility. Accelerating global growth historically coincided with a weaker U.S. dollar. In this case, though, all else is not equal. Global risk appetite has contributed meaningfully to USD performance throughout 2020. With a highly uncertain virus outcome ahead of us, we’d expect currency volatility to persist. As a result, we believe an overweight to international equities is best balanced with a currency hedge or a product with asset allocation overlay.
How to invest
To achieve a global equity overweight, investors can use pure international equity plays through a relatively low-cost passive ETF.
Additionally, investors could also pursue broader investment mandates that include U.S. companies and global companies. A strategy with a global mandate that seeks either companies who are growing their earnings, or companies that can pay a dividend could help investors navigate some of the COVID related market disruptions.
Finally, investors concerned about the broader themes of this piece – economic and political uncertainty, market volatility, and policy risk – could consider a global, dynamic, multi-asset, income-driven mandate.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any particular issuer/security. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
Any forward-looking statements are based on a number of assumptions concerning future events and although we believe the sources used are reliable, the information contained in these materials has not been independently verified and its accuracy is not guaranteed. In addition, there is no guarantee that market expectations will be achieved.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company.