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Of course, if I knew the best performing market over the next 10 years I would simply buy that and both our clients and I would be happy. It is the fact that you do not know the best performing market that pushes you into diversification. If you are properly diversified you will at least own some of the best performers (and you will also own some of the worst of course). The job of an investment manager is then to handicap these bets to make sure you own more of the good stuff and less of the bad.
We have two broad handicaps on at the moment. The first is we are very reluctant to stand in the way of the US technology juggernauts, so we make sure we have a decent allocation to them. The second is that we are struck (and have been for a while) by just how cheap some of the unloved markets have become (especially the UK, and parts of Europe and the emerging markets). This gives us a barbell of high-quality technology driven winners and some deep value opportunities. To illustrate that barbell here (via Goldman Sachs) are where major markets are currently trading compared to their 20 year averages:
Diversification means we own a little bit of all these markets. The barbell comes from the fact we try and be overweight the far left and far right parts of it.
A couple of observations here: the first is you can see the bet the market is making that AI will continue to see the US accelerate away from the rest of the world. The US is not just more expensive than everywhere else, but it is quite a bit more expensive than its own 20 year price range. The attraction of balancing this exposure with much cheaper European and Emerging Market stocks looks particularly acute to us today.
The other point worth making is that so far in 2024 this sort of diversification has paid off. Here are 2024 YTD returns:
You’ll see that European banks (a classic deep value play) have managed to out-perform the Magnificent 7 large US technology stocks so far this year. And that out-performance has in fact been running for a while now. Here is relative performance for European Banks vs US large cap technology since the end of 2020:
At some point, valuations fall enough that if things just don’t get worse you can generate some healthy returns. It looks like the UK and Europe may just have got there. Diversification had a pretty tough run in the 2010s. You should have just owned the US or, even better, the technology heavy Nasdaq. I take some comfort from the fact that for the last few years it looks to be working better.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
