Our International ETF strategy analyzes fiscal and interest-rate policy and complements that research with trading analytics to determine portfolio risk/reward and valuations. The strategy has the benefit of flexibility in allocation by market cap size and developed vs. emerging markets.
It was very encouraging to see demand return to the international equity market in late December after the post-election weakness. There has been a steady bid across markets as economies and foreign banks appear to be on a firmer footing than was feared 6-12 months ago. Developed markets, which struggled vs. emerging markets last year, have moved ahead nicely in Q1. Europe and Asia continue to trade near 52-week highs, and short-term weakness has been met by strong demand from market participants. Perhaps the loose monetary policy currently followed by Japan and Europe will have an effect on market prices that is similar to what we have seen domestically in the recent past. 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 has been the beneficiary of strength in Europe and Asia. As European banks began to rally in late 2016, the broader markets exhaled and rallied. It will be interesting to follow bank balance sheets and the need to raise capital going forward as a barometer for further upside. While equity markets can rally without bank participation, it is rare that markets can have a prolonged rally on broken banks. If the banks can hold near current price levels, our outlook for the broad international markets is positive. We will follow that situation closely from both a fundamental and technical perspective. Asia trades firm, and we are comfortable with our current exposure in that region.
Emerging Markets (33%): Trump’s election unleashed heavy selling in EM (NYSE:EEM), but it was short-lived and buyers bid aggressively throughout Q1. While it is difficult to label EM cheap vs. 12 months ago, we cannot ignore allocation decisions being made by investors who had abandoned the asset class during and after the brutal 2013-2015 period. How long will the reallocation to EM last? Impossible to forecast, but we are seeing better economic numbers and broadening interest across Latin America, emerging Europe, and Asia. We participate in both regional and individual country ETFs that offer positive risk/reward characteristics. The performance from India and Latin America has been a benefit to the strategy.
Cash (10%): Although they are a drag on performance in strong up markets, the diverse international markets normally offer multiple trading opportunities each year. We will use our cash to add to current positions on weakness and/or to seize new opportunities in the near future.