Look for Relative Value Opportunities
Chaotic markets can create deviations from the norm across asset classes.
The future remains profoundly uncertain, as we are still dealing with the first-order effects of the COVID-19 pandemic. And while uncertainty may prompt investors to take a defensive, high-quality approach in their portfolio’s core, relative value opportunities may emerge that can be expressed peripherally.
Trim the Home Bias
The pandemic has intensified the behavioral tendency of home bias — when investors favor domestic equities and ignore the potential benefits of diversifying into foreign equities.
Outflows into non-US-focused ETFs are at their worst point for any three-month period ever, with $34 billion coming out over the past 12 weeks. Meanwhile, inflows into US-focused strategies have increased, leading to a differential well above the historical 90th percentile.1 Commodity Futures Trading Commissions’ futures positioning data for asset managers reveals a similar trend. In 12 of the past 16 weeks, positioning has been reduced for emerging markets exposures, while managers have added to their US futures longs.2
That positioning is a byproduct of non-US exposures underperforming the US for 25 consecutive months3 — the fourth-longest stretch ever. This underperformance has also strengthened the valuation case. Multiples are more attractive outside the US, with developed ex-US and emerging market exposures both trading in the top 90th percentile — some in the 100th — across four valuation metrics relative to their 15-year history, as shown below.4