Global equities are represented by the MSCI ACWI Index. One way to measure this is via the relative spread between the earnings yield on equities and the spread on corporate bonds. At PIMCO, we expect the global economic recovery to continue in 2021. The earnings yield should generally trade at a premium versus credit spreads: Equity investments are more sensitive to earnings volatility and therefore investors should be compensated for the risk that earnings could decline. Equity performance tends to be cyclical around the world.Some regions outperform others over a decade, only for the trend to reverse during the next decade:Chart Source: iSharesThis often has less to do with actual economic performance of those regions, and more to do with changes in valuation levels of their stocks. Furthermore, while progress on the development of a vaccine has been heralded, the timeline for mass production and distribution remains unknown. The drawdown in equity and credit markets was one of the fastest on record. Source: PIMCO, governments and central banks as of 30 November 2020. In practice, many investors will consider an allocation to international equities well below global market-capitalization weight based on their sensitivity to a number of considerations, including volatility reduction, implementation costs, taxes, regulation, and their own preferences. To get the full diversification benefits, we recommend that you consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds. In our mid-year asset allocation outlook, we observed that despite the massive shock to the real economy, valuations of risk assets appeared close to fair after taking into account the impact of lower discount rates and extraordinary policy support. As of December 31, 2019, the index was comprised of 3,266 common stocks. Note this is very different from the procyclical austerity-oriented policy adopted in the euro area following the 2008–2009 and 2011–2012 recessions. U.S. inflation expectations based on 5-year breakeven inflation; European inflation based on 5-year/5-year inflation swap; Japan inflation based on 5-year/5-year inflation swap. These numbers are somewhat daunting compared to the 168% earned by international stock funds during the same period. Download our investor handout to learn about how we are positioning portfolios across global asset classes. Data is proving this logic to be sound - index funds recently outperformedthe average stock picking mutual fund for the ninth year in a row. The recovery appears well underway as global economic activity rebounded sharply during the third quarter. Currently, I’m 90% stocks, 10% bonds and within my equities, I’m at 60% domestic, 40% international. Information on this site is for general informational purposes only and should not be considered individualized recommendations or personalized investment advice. The U.S. and China remain dominant players in the global technology sector, and therefore remain a focus, but we are also looking to take advantage of themes playing out in other regions, such as green energy in Europe and automation in Japan. We also believe gold provides a good store of value over the long term with a low correlation to traditional risk assets. Going forward, the Fed will also require inflation to be at or above the 2% inflation target in order to raise rates. A report from Vanguard found that having between a 40-50% allocation to international equities actually reduced volatility to below 15%. Economic policy is another key swing factor that could lead to both upside and downside surprises. We believe investors should consider building portfolios that can benefit from smoother waters in 2021, but also should embed sufficient diversification to be able to withstand the choppy patches that may arise. That was blatant sarcasm. This dynamic has led to attractive valuations for many inflation-linked assets, and we believe it is a good time to add inflation hedges to multi-asset portfolios. I see the diversification benefit in international exposure, but am not comfortable with a fully market-weight international stock allocation. One assumption that I’m making is that moving forward we’ll see domestic and international stock returns fall between what we’ve realized over the last two decades. Of course, scaling of positions needs to be approached with caution as economic conditions could worsen if virus containment efforts are not as successful as hoped for, or the timeline for mass availability of vaccines gets pushed out. Ten-year Treasury bond yields may rise as high as 1.6% in 2021, reflecting prospects for faster economic growth. We are overweight equities given expectations that corporate earnings will rebound in 2021 and interest rates will remain low. Credit spreads have tightened meaningfully since March and April, and while we believe credit is less attractive than equities on a relative basis, we see pockets of opportunity in certain segments. The major near-term risk is that virus containment efforts hinder the economic recovery. Over the last forty-one years, the median return for domestic stocks was 16.09% versus 11.63% for EAFE, even though the compound return for domestic stocks was only 0.06% higher. Additionally, the low yield environment could act as a tailwind for risk assets through increased demand from investors who face a tough choice between increasing risk and reducing their return objectives. Our expectation is that inflation globally will remain subdued in the near term as the effects of the pandemic – weaker consumer demand, lower energy prices, and higher unemployment – keep the price of goods in check. As the global economy transitions to an early cycle phase, we expect profit growth to accelerate, although a high degree of uncertainty remains on the speed and strength of recovery given the opposite forces of slow economic activity and record monetary and fiscal stimulus. I see the diversification benefit in international exposure, but am not comfortable with a fully market-weight international stock allocation. Increased earnings growth is positive for both equities and credit, but it provides a more significant tailwind for equity markets. Overall within our multi-asset portfolios, we favor a modest overweight to risk assets – both equities and credit. While almost no one, including us, predicted how the pandemic would unfold in different parts of the world, its aftermath has left the global economy in a completely different place in less than a year. Keeping the international allocation in the taxable brokerage account where she can “take advantage” of the Foreign Tax Credit costs her $506 a … The geographic breakdown includes Australia, which reigns in majority allocation of 59.9%, Hong Kong at … The improvement in fundamentals should bode well for risk markets and cyclical assets in particular. While adding an allocation of 20% to 40% has historically been beneficial, adding too much can increase portfolio risks without the commensurate benefits. (We discuss gold valuations in this recent blog post.) Moreover, we advocated a modest risk-on posture in multi-asset portfolios with emphasis on higher-quality, resilient sectors given a wide range of potential outcomes. April 2021 Stock Market Outlook Apr 1, 2021 4 Aggressive Growth Funds to Add to Your Portfolio in 2021 Mar 3, 2021 3 Best Vanguard Mutual Funds to Buy in April Mar 24, 2021 This happens to be between the international allocation of Fidelity’s target-date funds, which are 70% domestic, 30% international, and Vanguard’s target date funds, which are roughly 60-40. None of the information on this page is directed at any investor or category of investors. We are focused on assets that can serve as both an inflation hedge and a diversifier in a scenario of weakening economic conditions. Learn more about domestic vs. international stocks Vanguard research has shown that while holding some portion of a diversified equity portfolio in international equities has helped to temper the volatility of U.S. equities, the majority of the benefit was achieved as the international allocation increased from 0% to 20% of total equity exposure, with incremental additional benefit up to 50%. In 2021, we expect the global economic recovery to provide a tailwind for risk assets. Investing in international stocks, while delivering expected returns similar to domestic stocks, provides the benefit of diversifying the economic and political risks of domestic investing. Therefore, we are seeking to balance the portfolio against two primary risks: lower-than-expected growth and higher-than-expected inflation. So it makes sense to consider diversifying your portfolio by taking advantage of the large asset class of inter… In Europe, we expect fiscal policy to remain stimulative versus pre-pandemic, though governments are expected to let many of the discretionary COVID-related measures roll off in 2021. While the future monetary and fiscal policy mix will be a critical factor in determining the longer-term path of inflation, we believe the risks are skewed to the upside. This is why, historically, equity markets have generated higher risk-adjusted returns during the early stages of a business cycle. According to a mutual fund tracking the FTSE Global All-Cap Index, a market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world, as of mid-2013 about 51% of the world's stock investment opportunities, as measured by market capitalization, are outside of the United States. We also favor select emerging market government bonds, including Peru and China, which offer yield advantage and have tended to perform well during risk-off events, as another portfolio diversifier (see Figure 5). Portfolio Manager, Multi-Asset Strategies. The index is designed to be the broadest measure of the non-S&P 500 domestic stock markets. The main reason to own international stocks is to minimize the chance of unfavorable portfolio outcomes. As communities and investors alike eagerly anticipate the end of a historic year, many are hoping for calmer waters ahead in 2021. In emerging market credit, we see attractive opportunities but prefer to take exposure in more liquid instruments. We remain overweight equities in our multi-asset portfolios and select areas of the credit markets and have added exposure to more cyclically oriented sectors and regions. The S&P 500 has a 10% allocation to financial stocks, while emerging markets and developed international indexes have a 17% and 15% allocation to financial stocks, respectively, according to DataTrek. Source: Bloomberg and PIMCO as of 30 November 2020. Despite a challenging year in 2020, for financial markets the year has been extraordinary. “The international equity allocation for both types of funds will increase from 30% to 40% of equity exposure, and the international fixed income allocation will rise from 20% to 30% of nominal fixed income exposure. In light of quantitative analysis and qualitative considerations, we have demonstrated that domestic investors should allocate part of their portfolios to international securities and that a 20% allocation is a reasonable starting point. While international stocks make up about 50 percent of the global market cap, a domestic bias for U.S. investors makes … However, we continue to focus on portfolio diversification and resiliency given the path of potential outcomes remains unusually wide amid the unresolved health crisis. Source: MSCI ACWI world index as of 30 November 2020. High quality emerging market local debt is represented by Hungary, Singapore, Poland, Czech Republic, Israel, South Korea, Thailand, China, Chile, and Malaysia. U.S. Treasuries have more room to rally than most developed market government bonds and are likely to remain the flight-to-quality asset of choice, so we remain overweight in our multi-asset portfolios. You have not saved any content. Within corporate credit, sectors are recovering at different paces depending on how the pandemic affected them. The Fed’s commitment to overshoot its inflation target is supportive for equities, which look attractive given what is likely to be an extended period of negative or low real yields. To be sure, the global economy is not out of the woods just yet and the trajectory of the pandemic will undoubtedly influence the speed of the economic recovery. Completion Total Stock Market Index is an index of all actively traded U.S. common stocks that are not included in the S&P 500. Conversely, if she held the U.S. stock fund in the 401(k) and the million dollars in international stocks in a taxable brokerage account, she’d owe $4,311. In short, nothing about 2020 was normal. We favor U.S. equity markets given higher profitability and growth characteristics, and are constructive on Japan and select emerging markets, which should benefit from a cyclical recovery. We are also modestly overweight select, high-quality emerging market government bonds that may perform well during risk-off events. Whichever party controls the Senate will have a very thin majority, meaning compromise will still be crucial to passing legislation. With the U.S. election behind us and positive developments on the vaccine front, we are beginning to position multi-asset portfolios to benefit from a cyclical recovery. We favor a moderate risk-on posture in multi-asset portfolios as we expect the global economic recovery to continue in 2021. Please log in or register to access this content. Source: MSCI, FactSet estimates, Bloomberg, and PIMCO calculations as of 31 October 2020. Asset allocation basically means portfolio diversification. Most stock market gains come from a small number of big winners. However, PIMCO expects it to be a “long climb” with hiccups along the way (as we discussed in a June 2020 blog post), and it could take up to two years to reach pre-COVID levels of global output. Liquidity provisions include loan guarantees, forbearance, tax delays, and new loans. For U.S. investors, the existing asset-allocation framework contains three geographic tiers: 1) domestic, 2) foreign developed markets, and 3) emerging markets. We see two primary risks to our positioning – lower growth and higher inflation – and we are focused on hedging against these. Most US investors are probably allocated too high of a percentage in US Stocks and should invest more internationally. These sectors include technology companies, which are supported by strong fundamentals and stand to benefit further from secular trends accelerated by COVID. While we are positioning to benefit from a cyclical recovery, it remains critical to build portfolios that can withstand a range of economic scenarios. Chart shows 2020 fiscal measures as a percentage of each country or region’s gross domestic product.
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