Checking In On International Equity Markets

Businessman, Internet, Continents

We’ve written extensively about our growing optimism on international equities recently, and our enthusiasm hasn’t faded. We’re encouraged by economic data that continues to rebound, while the approval, acquisition and distribution of vaccines seem to be improving at the same time. We think this creates a compelling opportunity to reinvest in the revival of developed market equities, all while the region takes encouraging, albeit cautious, steps to reopen local economies.

Vaccinations Are Picking Up Steam

Since the beginning of March, COVID-19 vaccination rates have steadily improved throughout Europe, which is a major component of the international equity region. The trend is promising, with 20% of the four major European economies having received at least one dose. The United Kingdom has had the most success thus far, hovering at nearly 50%.

Figure 1_Vaccinations

Since the vaccination program gained momentum in March, a few countries (most notably the U.K.) have begun to revive their economies one step at a time. While the pace certainly remains cautious, we think the rest of the region may not be far behind. 

A Cyclical Revival

The vaccine momentum leads us to believe there’s potential for a strong revival in cyclical economic sectors, which are key pieces of developed markets relative to the rest of the world. In the chart below, we group the weights of the Financials, Industrials, Materials and Energy sectors—those most levered to overall levels of economic activity—together into our Cyclical category, while Growth/Defensives contains the remaining weight. 

Developed equity markets, proxied by the MSCI EAFE Index, are nearly 45% comprised of cyclical sectors, roughly a 20% over-weight to the S&P 500 in the U.S.

Sector Composition of Regional Equity Markets

Figure 2_Sector Composition of Regional Equity Markets

How Quality Can Help Overseas

Sector composition is not the only potential catalyst we see in developed markets, however. Recent factor performance has looked promising as well.

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Disclosure: Unless otherwise stated, all performance and information sourced from WisdomTree, FactSet, Morningstar, and/or Zephyr StyleADVISOR, as of March 31, ...

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