Revisiting Opportunities In Developed Markets (IDEV)

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June 21, 2017 4:00pm NYSE:IDEV

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In general, U.S. equities have had quite a run recently and we believe most sectors are fully-valued to over-valued at this point.


However, this is not the case for international equities, where we are seeing pockets of opportunity primarily in developed markets, such as Europe and Japan. Equity markets in both regions have lagged the U.S., though fundamentals in many developed regions are on more solid ground than they have been in recent years.

Accommodative monetary policies in the euro zone are a positive for their economy and equities. As deflationary pressures in the area have subsided, the European Central Bank may take further rate cuts off the table. However, we do not expect them to exit their accommodative policy over the near term as inflationary pressures remain in check largely due to weaknesses in wage growth. Despite much political turmoil, Brexit, and uncertainty in the region, business sentiment is strong, GDP growth is expected, and bank lending has grown, which indicates less perceived risk. Most of the indicators we follow suggest continued strengthening in the euro zone.

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The Bank of Japan also remains accommodative with both quantitative and qualitative easing. This positioning is expected to continue in the near term, providing the backdrop for a strengthening economy, while positive fundamentals point to an expanding economy. Japanese exports are rising, unemployment numbers look better, and many indicators, such as production, suggest GDP growth.

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With expected GDP growth in major developed regions, international equites are attractive in our opinion. Additionally, valuations relative to U.S. equities indicate there are opportunities abroad as these markets begin to follow the U.S. after lagging for some time now.

While we favor foreign developed markets, we are not as optimistic regarding emerging markets at this point. Equity fundamentals do not appear to support the recent run up in emerging market equity valuations. Furthermore, these economies are highly dependent on capital flows, currency moves, and commodities prices, all of which can turn quickly. With concerns over debt levels in China and overall structural weakness, we do not believe the risk/reward tradeoff is attractive for the emerging markets on a relative basis.

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There are several ETFs available for investors wanting to gain exposure to the developed, foreign markets. Among the many options, the iShares Core MSCI International Developed Markets ETF (IDEV) provides a lower cost indexing approach that aims to replicate the MSCI World ex USA index. The Goldman Sachs ActiveBeta International Equity ETF (GSIE) provides diversified exposure to developed markets using a factor based methodology. Finally, the PowerShares S&P International Developed Quality Portfolio (IDHQ) invests in the highest quality stocks within the S&P Quality Developed ex US LargeMidCap Index by ranking the stocks based on three fundamental measures: return on equity, accruals ratio, and financial leverage.

At the time of writing, Stringer Asset Management LLC (SAM) clients owned GSIE. SAM is a Memphis, TN third-party investment manager and ETF strategist. Contact SAM at 901-800-2956 or at info@stringeram.com.

The views expressed herein are exclusively those of Stringer Asset Management LLC (SAM), and are not meant as investment advice and are subject to change. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. SAM is not making any comment as to the suitability of any funds mentioned, or any investment product for use in any portfolio. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance.

About the Author: Kim Escue

KimKim Escue is co-founder and Senior Portfolio Manager of Stringer Asset Management. Ms. Escue is responsible for security selection, as well as helping develop the firm’s short-term and long-term asset allocation strategies. She holds the Chartered Financial Analyst designation and is a member of the CFA Society of Memphis. She is also a frequent contributor to various industry publications.

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