Thursday, August 8, 2013

UPDATE: The New Emerging Market

by Matt Malick and Ben Atwater

From January of 2002 through September of 2007, emerging market equities experienced incredibly robust growth.  (“Emerging markets” is a label given to a group of immature, but fast-growing economies, most notably Brazil, Russia, India and China.)  During this almost six-year period, the MSCI Emerging Markets Index expanded by nearly 280%, which dwarfed the 33% return of the Standard & Poor’s 500.

As a result, financial advisors began to discover and then increasingly escalate their exposure to emerging markets.  In the minds of most investment strategists and market commentators, emerging markets were quite clearly the future and the trend would endure.

We all know what happened in 2008 - every stock market in the world swooned.  And then, they began to recover.

Over the past two years, though, emerging markets have faltered.  In defiance of conventional wisdom, since August 1, 2011, emerging markets have declined by more than 17% while the S&P 500 has surged almost 25% - a 42% performance differential.

Money flows have flip-flopped in favor of the U.S. for two primary reasons: (1) a quest for high-quality dividends in a low interest rate environment and (2) the perceived safety of the United States relative to the rest of the world.  Even within the S&P 500, we have seen stronger returns in recent years from companies that pay dividends and generate the bulk of their sales within the United States.

Since starting our business in 2008, we have been bullish on U.S. equities and our client portfolios, while globally diversified, have been positioned to take advantage of this expectation.  We anticipate that American equities will continue to lead in the near-term.  Cycles like these tend to reverse themselves only when they reach extremes in sentiment and valuation.  And at this point in the current bull market, many are still highly skeptical of equities, while the S&P 500 appears fairly valued, albeit not cheap.

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