Investors looking for contrarian ideas for 2023 don’t need to look much further than ex-US developed markets equities.
In fact, that’s been one of the most widely cited contrarian ideas for several years now, owing in part to depressed valuations. With 2023 right around the corner, there’s once again momentum for developed market equities as rebound ideas in the new year, and that could fuel interest in exchange traded funds such as the SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX).
As its name implies, RDMX provides investors with developed markets equity exposure with an environmental, social, and governance (ESG) overlay – a potentially meaningful trait because some ex-US developed economies are home to stock markets that are heavily weighted to energy and materials companies that could potentially be ESG offenders.
Importantly, RDMX also provides exposure to a variety of developed markets where stocks are deeply discounted relative to their historical norms and compared to the S&P 500. That includes the U.K., which accounts for 13.33% of the ETF’s roster.
“The sectors that play significant roles in the U.K. economy have a lot to do with the outperformance. While the worst-performing sectors globally and in the U.S. are technology, communications, and consumer discretionary, comprising nearly half of the U.S. market, those same sectors comprise only 10% of the U.K. market. The three largest sectors in the U.K. are consumer staples, financials, and energy, comprising more than 50% of the U.K. stock market, but less than 25% of the U.S. market,” reported Lauren Foster for Barron’s.
Another advantage offered by RDMX is that many ex-US developed markets are heavy on value stocks and light on growth fare, such as the communication services and technology sectors. That’s worth noting because when value outperforms growth, it often does so for extend timeframes, indicating RDMX has some credibility as a long-term option for patient investors.
“And it isn’t just in the U.K.: Countries with the smallest exposure to technology, consumer discretionary, and communication stocks fared better,” according to Barron’s.
Those three sectors combine for about 21% of RDMX’s weight. Conversely, financial services – the epitome of a value sector – commands 21% of the ETF’s weight on its own.
Adding to the case for RDMX are two factors. First, developed markets stocks are under-owned by U.S. money managers; second, earnings quality is improving overseas while it’s deteriorating in the U.S.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.