What's On Tap...

The International Illusion

As the attention of the investment world has been laser focused on the U.S. election, a significant dislocation has been unfolding. Developed international equities are substantially underperforming.

                                                             Source: FactSet

                                                             Source: FactSet

Economically, there has been quite a lot of improvement. GDP is positive in many Eurocountries, although inflation continues to be weak or negative in some cases. Growth figures rival that of the U.S. while the core Euro countries are trading at significantly depressed levels. Several of these options are now yielding more than their U.S. counterparts:

*Trailing P/E & Yield represent statistics for the iShares single-country ETFs (Germany=EWG, France=EWQ, Italy=EWI, Spain=EWP, Switzerland=EWL, United Kingdom=EWU). Source: FactSet

*Trailing P/E & Yield represent statistics for the iShares single-country ETFs (Germany=EWG, France=EWQ, Italy=EWI, Spain=EWP, Switzerland=EWL, United Kingdom=EWU). Source: FactSet

This has not stemmed the precipitous decline in the Eurodollar back to 2014 lows, which has been a large drag for U.S. based investors. This is an important observation – the currency moves have created the illusion of complete disaster, when most of these countries have been experiencing local bull markets – though all still lag the S&P 500 by significant margins:

*Source: FactSet

*Source: FactSet

We use quantitative methods for evaluating and constructing our tactical portfolios. This has kept us largely out of the developed international markets and instead favoring emerging markets. Still, we believe that there is opportunity lurking in Europe that will be triggered by a reversal in thedramatic U.S. dollar strength and it is a concern that the index appears to be making another bullish breakout:

                                                                                *Source: FactSet

                                                                                *Source: FactSet

This is one of the biggest international factors we are watching going in to 2017 – whether the recent dollar strength is the beginning of a new trend, or if we will remain within the range of the last two years.

 
 
William Royer, Portfolio Manager

William Royer, Portfolio Manager

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