EC Equity Reallocation Between US, Developed And Emerging Markets

Within the equity allocation of portfolios, with tax awareness, we are taking these actions in discretionary accounts, and are recommending these actions in advice & consent accounts, and in coaching relationships:

  • Underweight US stocks (preferably to less than the 52% world weight)
  • Overweight non-US Developed Mkt stocks (preferably to more than the 39% world weight)
  • Overweight Emerging Mkt stocks (preferably to more than the 9% world weight)

We have been strongly overweight US stocks within the equity allocation for years, and that has been beneficial; but now evidence suggests that greater opportunity lies in other parts of the world.

A significant challenge we face is the pretty much across the board embedded gains in our stock positions. Reallocation in tax deferred accounts is not a problem, but in regular taxable accounts, we need to understand the taxable gain preferences (and tax loss carry-forwards) of our clients versus their need to reallocate.

The following information supporting our view provides:

  • Comparative valuation measures for the three regions (US, non-US Developed and Emerging markets)
  • What is fair value of stocks today relative to bonds?
  • Recent and multi-year relative total return performance of the three regions versus the world index
  • Multi-period institutional forward return forecasts for the three regions
  • Net flow of funds to US and International/Global mutual funds and ETFs
  • Current short-term technical ratings for the three regions and the world
  • QVM intermediate-term trend ratings for the three regions and the world.

COMPARATIVE VALUATION MEASURES 

  • Price-to-Book Value Ratio
  • Price-to-Sales Ratio
  • Price-to-10yr Av Earnings Ratio (by Robert Shiller, Yale Economist, Nobel laureate)
  • Price-to-Highest Historical Earnings Ratio (by John Hussman, analyst and mutual fund manager)
  • Price-to-Total of Book Value and Debt (by James Tobin, deceased Yale Economist, Nobel laureate)

The short-story here is that by each measure, the US is the most expensive; non-US Developed markets are either somewhat less expensive or mostly significantly less expensive, and Emerging markets are significantly less expensive.If we are seeking best relative value, and potentially least exposed to valuation contraction, regions with lower Price-to-Whatever ratios are generally more attractive.

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Disclaimer: "QVM Invest", "QVM Research" are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

Important Note: This report is for informational purposes only, ...

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Bill Johnson 1 year ago Member's comment

Well worth the read.

Roger L. Morris 1 year ago Member's comment

Agreed.

Richard Shaw 1 year ago Author's comment

Very kind. Thank you.