Global Allocation Insight

Resist the home country bias
to find better opportunities

May 17, 2017 / By Russ Koesterich, CFA, JD

U.S. stocks have had a prolonged period of outperformance vs. international stocks. But market leadership appears to be shifting to international stocks.

International equity markets are starting to catch up with the United States. For much of the eight-year bull market, U.S. equities have outperformed foreign stock markets. Not surprisingly, this has led many investors to question the benefits of international diversification. However, history shows that relative performance between U.S. and international markets is cyclical, and over the past year the performance of international stocks, both developed and emerging, has strengthened relative to U.S. stocks.

This change in market leadership is being driven by several factors overseas, including lower valuations, aggressive monetary accommodation and improving economies. It also reflects the fact that after producing stellar, double-digit gains for much of the past five years, U.S. equities have become a bit of a crowded trade. While U.S. stocks are likely to continue moving higher, investors have begun to recognize that the best opportunities no longer lie exclusively in the United States.

Cycles of relative performance between U.S. and international stocks

One-year rolling returns since 1971

Cycles of relative performance between U.S. and international stocks

Source: Morningstar Direct. As of 4/30/17.

Within the BlackRock Global Allocation Fund, valuation is a key consideration in our security selection and allocation decisions. From an asset class perspective, we believe equities provide the best prospect for total return, but with increasing divergence in regional performance. We prefer non-U.S. equities, primarily in Japan and Europe, and companies within select emerging markets. Within fixed income, we have trimmed the fund’s exposure to credit given tight spreads and re-allocated exposure to emerging market sovereign bonds, which we believe offer better risk/reward opportunities. We maintain exposure to gold-related securities as a diversifier given its historical uncorrelated relationship with global stocks.

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Portfolio highlights

  • Markets may have gotten ahead of themselves given the divergence between “hard data,” which measures actual economic activity and “soft data,” which mostly tracks sentiment. While soft data has improved since the 2016 U.S. presidential election, hard data has decelerated.
  • We modestly added to U.S. duration by purchasing 5-year U.S. Treasury notes.
  • We increased exposure to gold-related securities during April, as the likelihood of a U.S. growth breakout continues to diminish and the regime of low growth and inflation persists.

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