Money Moves: How should investors be positioned within International equities, and where have dollars actually gone?
Listen to On the Minds of Investors
This blog, written in cooperation with our Portfolio Insights team, is the second in a series focused not just on fundamental analysis but also on where investor dollars have actually been directed. We believe that real-world investor positioning can often be as important in determining market direction as the fundamentals, and that many investors would benefit in understanding how their peers are positioned. Each blog will focus on a specific opportunity set; this one is on international equities.
Following positive vaccine news in November 2020, it became clear that the COVID-19 pandemic could finally begin to wind down. As such, many investors started to look for the best opportunities to take advantage of the inevitable upshift in global growth – one was international equities, which have far greater cyclicality than U.S. equities. Now, though, the story has changed, and optimism about international has waned. As a result, many investors may be wondering: is there still room for international in a portfolio? Certainly, part of the answer lies in the macro-fundamental backdrop; but some will also lie in the flow of investor dollars. After all, the fundamentals matter little if there are no “buyers” of the story.
At around the time of the successful vaccine news, international markets had a number of strong expected tailwinds relative to the U.S.: valuations were cheap (even relative to history); dividend yields were elevated; the policy response had been roughly as robust; and pandemic management had been superior. Shortly thereafter, though, a good portion of this thesis began to deteriorate. Foreign markets remain cheap and with a high dividend yield; but the U.S. has since passed an additional $2.8 trillion in fiscal stimulus, with perhaps more on the way, and the U.S. vaccination campaign has been far more successful. This last point is of critical importance: many foreign markets are on lockdown as they are ravaged by another wave of COVID. Meanwhile, the same cannot be said for the U.S.
Actual investor positioning suggests that the newly minted concerns for the international recovery have been incorporated into portfolios. U.S. investors have notoriously been underweight foreign markets relative to our own asset allocation views, both developed and emerging; while this began to change in the earlier months of the year, it has since partially reverted, as shown in the chart below.
Moving through the year, however, this story should change. It is inevitable that foreign markets, both developed and emerging, ramp up their vaccination programs. After all, the per-capita vaccination rate can only move in one direction. Herd immunity may come later than in the U.S., but when it arrives, the global cyclical upswing predicted in November will finally begin in earnest, fueling local-currency outperformance from regions that are much more cyclically exposed. Alongside that upswing, the U.S. dollar should decline, providing another tailwind for U.S.-based investors in foreign markets.
All told, investors may have to be patient for a bit longer, but the pause we are experiencing on the international recovery should serve as an excellent opportunity to assess and potentially address any underweights to the asset class. With future domestic market returns constrained by heightened valuations, other opportunities must be sought out: international equities remain one of the best.
U.S. investors have shied away from international in recent months
Investors underlying holdings data
Source: J.P. Morgan Asset Management
Money Moves: How should investors be positioned within the Fixed Income market, and where have dollars actually gone?
Given the modest back-up in yields over the last several months, many investors are wondering if, and how, the role of fixed income in a portfolio might change moving forward.
JPMorgan International Focus Fund
Focuses on maximizing return potential by flexibly pursuing our best investment ideas across all regions and sectors of the international markets.