A global economic recovery increases the potential for a rotation away from richly-valued U.S. stocks. However, the growth outlook is not yet sufficiently robust to warrant such a shift. Moreover, recent new economic and social restrictions in a growing list of countries will further mute economic prospects.
A just-published report concluded that a sustained rotation out of the U.S. market still awaits clear evidence that sustained, solid economic growth will develop in the year ahead, including a decisive improvement in trade. Despite a stiff valuation premium, the U.S. market still has relative earnings advantages that warrant maintaining a mild overweight stance. The U.S. has a higher weighting in tech shares and smaller weight in financials compared with non-U.S. markets, which remains a positive influence on relative regional stock performance.
The report reiterated our preferred allocation: mildly overweight the U.S. in a global equity portfolio, complemented with an overweight stance on select EM Asia, including China, Korea and Taiwan. We are neutral on the euro area (and see it as an upgrade candidate), Sweden and Switzerland, while still underweight other bourses.