The Case for Underweighting U.S. Equity

Posted byJourneymanPosted inResearchTags:, , , , , , ,

And a Once in a Decade Opportunity to Overweight EM Equity

In the last decade, Emerging Markets equity performance has been lagging its U.S. counterparts by a significant 50% margin. Undoubtedly, part of this is contributed by the gain of = hot technology stocks in the U.S. (FAANG). However, currently U.S. earnings growth is peaking out while EM’s may have just hit bottom, which could be the trigger for more manager to shift allocation to EM.

Since 2012, EM Relative decline in ROE vs U.S. has been accompanied by a greater amount of multiple contraction. It is unthinkable that going forward EM equity is going to underperform U.S. equity, even in the case of recession.

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MSCI US and S&P500 Valuation Relative to World

At this point in time, should investors not have exposure to U.S. equity at all?

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MSCI US and S&P500 Valuation

U.S. valuation is not ridiculously high based on its earnings, but record high margin is a concern for the current valuation.

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SPX Profit margin

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Published by Journeyman

A global macro strategist and equity portfolio manager with over seven years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research, which led to his current job as quantitative equity portfolio manager at a bank. He read voraciously, spending most of his weekend reading The Economist magazine and books on finance, history, and psychology. The author also works part-time for Getty Images. To date, he has over 1200 pictures over 40 countries being marketed through the company.

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