Knowables: Emerging Markets

Controllables

As mentioned previously, this newsletter follows our "Knowables" piece we sent a few weeks back. Contained within, we outline some investment ideas we can act upon or control, considering the things that we know.

International Equity

International Developed Markets

Valuation: In contrast to US stocks, many stocks among foreign developed markets have more compelling valuations.

• S&P 500 price-to-earnings ratio = 30.54x

  MSCI All Country World ex. US Index = 15.91x

Currency Tailwind: Since 2/13/2021, the US Dollar has appreciated 18.18% versus developed market economies, as measured by the US Dollar Index DXY, showing strength not seen since 2002.

• Investing internationally capitalizes on dollar strength, and should the dollar weaken, returns are enhanced by repatriating currency back into dollars. See chart.

Growing Interest Rate Disparity: US interest rates are higher than most developed global regions, namely Europe. Thus, European companies and governments can borrow at lower interest rates, which could stimulate business expansion and consumer spending, driving potential growth and higher corporate profits.

• Persistent low interest rates in Europe tend to compress equity valuations. In contrast, U.S. equities may become more expensive with higher rates. Investing in Europe could allow U.S. investors to gain exposure to markets with potentially more attractive valuations and higher upside.

Emerging Markets

Attractive Valuations: Emerging market equities are often trading at lower price-to-earnings ratios compared to U.S. markets, offering potential for higher returns as these economies continue to grow and stabilize.

Demographic and Economic Growth: Many emerging markets have younger, rapidly expanding populations and higher GDP growth rates, driving increased consumption and long-term economic expansion compared to the more mature U.S. economy.

Weaker Dollar Tailwind: A potential weakening U.S. dollar benefits emerging markets by reducing the burden of dollar-denominated debt and boosting export competitiveness, which can enhance corporate profitability in these regions.

US Mid-Cap Equity

Valuation Sweet Spot: Mid caps often trade at a discount relative to large caps, with some having higher growth potential than small caps, making them attractively valued amid current market conditions.

Strong Growth Potential: Mid-cap companies are typically in a phase of rapid expansion, often with higher growth prospects compared to more mature large caps, while still having established business models that reduce the risks associated with small caps.

M&A and Market Leadership Opportunities: Mid caps are frequently acquisition targets or poised to become future market leaders, which can create opportunities for outsized returns as they gain market share or are acquired at premium valuations.

In light of the current market dynamics, international equities, emerging markets, and U.S. mid caps may present a compelling investment opportunities for you. Attractive valuations, favorable currency trends, and potential growth drivers in these segments may provide opportunities to enhance portfolio diversification and capture future returns. By focusing on these controllable factors, investors can strategically position their portfolios to navigate evolving market conditions and capitalize on areas of potential outperformance.

As always, we're here to help you navigate these opportunities and align your investment strategy with your long-term goals. If you have any questions or would like to discuss how these opportunities may fit into your portfolio, don't hesitate to reach out. Thank you for trusting us with your financial journey, and we look forward to continuing to work together toward your success.