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AAM Viewpoints – International Investing: What Makes it Compelling Right Now?


We believe that now is a good time for investors to consider expanding their allocation to international equities. After suffering a bear market over the last year, international markets are inexpensive on conventional P/E (price per earnings) ratios. We think international recoveries are still developing and believe momentum could shift to their markets.


Europe suffered double-dip recessions over that last five years, but is now in recovery mode as pro-growth measures and accommodative monetary policies take hold. We believe lower oil and gas prices, as well as a lower Euro currency should help their economy. Anecdotal evidence such as stronger employment, improving auto/retail sales and expanding bank loans indicate a recovery.


We believe the development of the emerging market middle class should be a major driver of global growth going forward. As can be seen in the chart below, the ranks of the global middle class are expected to surge over the next decade and beyond. This steady state of income and spending growth reminds us of the U.S. baby boomer generation. Their spending behaviors could drive investment opportunities and lead investors to ask the questions, “Where do they spend? How do they spend? What do they spend money on?” We believe this demographic trend should drive better global growth as we recover from the global manufacturing slowdown.




forecasting a surge in the global middle class

Investors are underweighted in international equities as a result of the strong U.S. market outperforming the ACWI (All Country World Index) ex-U.S. index by over 10% annualized over the past five calendar years. The United States represented 53% of the MSCI All Country World Index (ACWI) at the end of 2015, up from 42% five years ago. According to a JP Morgan report, U.S. investors have, on average, a 75% allocation to U.S. equities. This seems like a heavy overweight to us versus the MSCI ACWI Index.




MSCI ACWI ex-US 5yr return minus S&P 500 5yr return

Source: Bloomberg, Todd Asset Management. Past performance is not indicative of future results.


 


As can be seen by the relative performance chart above, it is easy to understand why investors remain overweight their allocation to U.S. equities. We believe, given our outlook above, now should be a good time to consider reallocating exposure in anticipation of a potential move similar to the multi-year run of outperformance in the early 2000s.


 


CRN: 2016-0307-5200R


AAM is not affiliated with Todd Asset Management and was not involved in the preparation of this article. The opinions expressed herein are solely those of Todd Asset Management and do not necessarily reflect those of AAM.



This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at https://www.aamlive.com/legal/commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.


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