We find it interesting that relative strength trends in equity markets since the election seem to support our theory, contrarian though it may be. While all three are up nicely, both the Eurostoxx 50 and the Nikkei 225 in local currency terms have outperformed the S&P 500 since the November 8 election (through January 27, 2017). This outperformance has been obscured to US dollar-denominated investors by weakness in the euro and yen since the election, which underscores the importance of possessing a plan for foreign currency strategy when investing internationally, in our opinion. We’d also note that both Japan and Europe appear to be more contrarian than the US from the perspective of ETF fund flows over the past year; both markets saw major net outflows even as the US-focused ETFs reached record AUM. This suggests to us that investor sentiment surrounding European and Japanese markets is quite subdued, a contrarian positive in our opinion.
This analysis explains why we have started the year generally with a small overweight to Eurozone and Japanese stocks relative to composite benchmarks across our portfolios. It is worth mentioning that we have greater scope to further increase our international weightings if and when we can get greater clarity on the uncertainties cited at the outset. With regard to Eurozone, we are monitoring political developments closely, particularly the French election in late April, as a litmus test on political risk. In Japan, politics are stable, but we are watching central bank policy and movements of the yen closely to gauge risk.
Important Disclosure Information
Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve positive returns, avoid losses, or experience returns similar to those shown or experienced in the past.
Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability.
Using a currency hedge or a currency hedged product does not insulate the portfolio against losses.
ETFs are subject to substantially the same risks as those associated with the direct ownership of the underlying securities owned by the ETF. Additionally, the value of the investment will fluctuate in response to the performance of the underlying index or securities. ETFs typically charge and/or incur fees in addition to those fees charged by RiverFront. Therefore, investments in ETFs will result in the layering of expenses.
RiverFront Investment Group, LLC, is an investment adviser registered with the Securities Exchange Commission under the Investment Advisers Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). RiverFront also serves as sub-advisor to a series of mutual funds and ETFs. Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations.
Index Definitions: It is not possible to invest directly in an index.
Eurostoxx 50 Index provides a blue-chip representation of supersector leaders in the Eurozone.
Nikkei 225 Index is a price-weighted average of the 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Copyright © 2017 RiverFront Investment Group. All rights reserved.