Nothing Lasts Forever

Those who follow equity markets closely will be under no illusions about where the place to be has been in recent years.  The US equity market has handily trounced all-comers.  For US domestic investors who often have little overseas exposure, this has been great news.  However, it has also been good for non-US investors who adopt a global approach to investing.  The US makes up a huge part of the investing universe for global mandates and hence non-US investors have benefitted significantly.

S&P 500 (blue) versus MSCI Emerging Markets (orange) Indexed to 100 (Oct 2017 to date)

Source: Bloomberg

Nowhere has this outperformance been more obvious than versus emerging markets.  The chart above shows the huge gap that has opened up in recent years.  However, this has not always been the case.

S&P 500 (blue) versus MSCI Emerging Markets (orange) Indexed to 100 (Oct 2001 to 2007)

Source: Bloomberg

In the early part of this century, it was a very different story.  The chart above presents the same data series but between 2001 and 2007.  This time it was the emerging markets that did the trouncing and by an even wider margin than the current inverse disparity.

S&P 500 Relative to MSCI Emerging Markets (black, normalized to 100) versus the Dollar Index (magenta) 1990-date.

Source: Bloomberg

The final chart takes an even longer perspective and demonstrates the relative performance of the S&P 500 versus the MSCI Emerging Markets Index (black). The black line rising shows the S&P500 outperforming and vice versa.  Overlayed is the Dollar Index (magenta) where a rising line shows dollar strength.  The relationship is clear.

The point of this short piece is not to analyse why we have had these long periods of outperformance or why certain relationships hold.  The point is that to most investors today, international diversification means a significant bet on the US.  This has been a good bet in recent years, but it doesn’t tell us anything about whether it will be a good bet in the future.  True diversification means a meaningful allocation to both areas rather than allowing recency bias to drive allocation decisions.