“Opportunities right now are abroad,” said Azzarello. “I know international markets have not done the greatest year to date so there’s some hesitation there, but these markets compared to the US have a lot more runway, their valuations are relatively cheaper, they have more earnings firepower, and they’re just earlier in their cycles.”
While investors can still capitalize on the growth of U.S. equities in their portfolios, emerging markets is able to capture a diversification aspect necessary at the current, cheaper valuations. Should U.S. equities languish, investors with capital allocated into emerging markets are potentially exposed to international opportunities where the markets are beginning to gain strength following weakness.
“With respect to emerging markets, there’s a feast-famine mentality,” said Azzarello. “Investors think that they can buy and sell and time it. Structurally going forward, we just want to have just want to have more emerging markets in that diversified portfolio because the returns over the next 10 years are expected to be higher than the previous 10.”
Foregoing Conventional Wisdom
It’s easy for investors and financial advisors to simply apply tried-and-true market strategies, but Azzarello warns that investors must change with the times. This includes foregoing conventional indexes that are market cap-weighted–a strategy that has worked for years due to central bank easing.
Whether it’s multi-factor investing or other smart beta strategies, investors have a plethora of opportunities to generate profits without simply relying on traditional methods.
“That’s not going to apply going forward,” said Azzarello. “We know across the board, returns are coming down and what that means is you have to be more selective however you do that–sectors, factors, markets you want to be in, alpha generation is going to be unbelievably important in the next 10 years.”