Cumberland’s International ETF strategy analyzes fiscal and interest rate policy and complements that research with trading analytics to determine portfolio risk/reward and valuations. The flexible strategy allocates investments in terms of market-cap size and developed vs. emerging markets.
From a trading standpoint, the broad markets have weakened post-US election as traders attempt to determine the positives and negatives of a change in US trade policy. While the broad trading has been disappointing, it should be noted that most indexes continue to hold their post-Brexit breakout levels. It would be a positive trend if these pricing levels hold firm. After trailing the emerging markets for much of the year, developed markets have shown strong relative strength over the past six weeks or so.
That strength can be attributed to a better bid in Europe, particularly in Germany. The weak euro and yen cannot be ignored, as currency often plays a key role in how Cumberland manages capital. Current allocations and brief thoughts are provided for your review. Please don’t hesitate to contact us with any comments or questions.
Developed Markets: (57%) Our developed exposure is dominated by our two currency-hedged positions in Japan and Europe. These securities were beneficiaries of USD strength that gained further momentum post-election. The currency portion of the trade we evaluate on an ongoing basis, as that sword cuts both ways. In our developed-market allocation, we have a respectable weighting toward small caps because that area has shown nice relative strength in market pullbacks. From a strict fundamentals standpoint, it can be argued that developed markets are cheap in comparison to the US, but we realize markets can stay cheap for extended periods.
Emerging Markets: (38%) After a disastrous three-year run from 2013–2015, the emerging-market sector has strengthened this year and is currently consolidating some of those gains. The US election was the event that unleashed selling in EM as Trump directed trade comments directly at China and Mexico. While we do not own either of these countries directly, we do own indexes that include them. Although we are attracted to the current price levels from a risk/reward standpoint, in the short run the perception of the markets is often more important than reality. We would like to see better bottoming action before committing more cash to our EM holdings.
Cash: (5%) Our cash level has been between 5–10% throughout Q4. While cash acts as a cushion during market drawdowns, the lack of yield is a drawback. This current cash allocation is a level we are comfortable with as we attempt to identify attractive trading opportunities.