This year’s most talked about election in the world is less than two months away. The upcoming US election raises questions about the implications for the economy and financial markets as well as equity market volatility and risk. Yet, we routinely are asked about political risk in other countries in which we invest: “Aren’t you worried about Brazil?” or “France looks bad.” However, there is a big question we would ask global equity investors: what about the US, one of the most expensive equity markets and one that also faces significant political risk?
The benefit of global investing is that you always have the flexibility to go someplace else. The world is a big place and there are opportunities everywhere. And what a time to do that now.
A US-centric investor is focused on the Federal Reserve starting to lower rates in September. However, monetary easing has already happened in Brazil, Europe, and the UK. Stocks are much cheaper in these places (see Exhibit 1). Furthermore, when US investors shift their attention past monetary easing and toward the November election, equity market volatility is likely to increase.
If a US-centric investor looked at European or UK companies, whether in the energy industry or in the banking sector, for example, they would see the discount. But while a good number of European companies are priced at a steep discount relative to their US counterparts, many of these companies have the same global sales as their US competitors.
A US-centric investor typically would never consider Brazil, a country with two-thirds of the population of the US. However, one can find high-quality companies in Brazil that we expect will benefit from what we see as a significant decline in interest rates.
A US-centric investor also does not have the currency opportunities a global investor can exploit. The Japanese yen has started to move up off of a level we considered extreme. US interest rate cuts very much favor appreciation of the yen. An investor with global options can position for that by owning domestic Japanese companies.
At any given time, our team’s investment process remains aware of benchmark MSCI ACWI or Russell Global Index country allocations, which currently include around 65% exposure to the US. However, as active value managers, we build a portfolio from the bottom up, which may result in a major deviation from the benchmark. Those relative under- or overweightings of course represent “risk.” But risk goes both ways. It is what major opportunities look like as well.
So, we ask the question a different way: what value investor would put 60% or more of a portfolio into the most expensive developed market in the world with the risks in the US today? Not us—especially when we are finding far better opportunity elsewhere.
James J. Clarke
Portfolio Manager & Director of Fundamental Research
Sorin Roibu, CFA
Portfolio Manager & Research Analyst
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Groupthink is bad, especially at investment management firms. Brandywine Global therefore takes special care to ensure our corporate culture and investment processes support the articulation of diverse viewpoints. This blog is no different. The opinions expressed by our bloggers may sometimes challenge active positioning within one or more of our strategies. Each blogger represents one market view amongst many expressed at Brandywine Global. Although individual opinions will differ, our investment process and macro outlook will remain driven by a team approach.
