We are also monitoring valuations. Bitcoin’s recent surge indicates investor exuberance, with price momentum reaching dot-com, bubble-era levels. While a short-lived, sentiment-driven correction is possible, economic and earnings growth should continue to underpin investor confidence.
Best Ideas
We continue to believe U.S. small caps offer value and remain favorable, as they are poised to benefit from a re-opened economy and stimulus. Overall, our key investment theme centers on looking for quality across geographies, sectors and industries. Additionally, consumer-related industries within emerging markets appear attractive.
In Focus: Going Global For Better Returns
Non-U.S. equities have lagged U.S. markets, as the S&P 500 outperformed MSCI EAFE in 8 of the last 10 years. Will the trend soon reverse? A number of factors support the case that 2021 may be the year to seek better returns outside of the U.S.
The combination of extensive fiscal and monetary policy stimulus, along with the ending of the pandemic, are likely to lead to a strong, synchronized global economic recovery this year. Rising inflation expectations are pushing interest rates higher. While these factors support value stocks outperforming growth and cyclicals outperforming defensives, what does it mean for international equity versus the U.S.?
Index composition factors come into play when comparing EAFE to the S&P 500. First, information technology represents close to 28% of the S&P 500 compared to 9% for EAFE. To compensate, EAFE is overweight industrials by 7%, financials by 7% and materials by 5%. The U.S. market has understandably outperformed over the last decade, as growth stocks, led by technology, have trounced value stocks in a world of declining interest rates and sub-trend global growth.
But should above-trend global growth and higher interest rates materialize, 2021 may be a better environment for value and cyclical stocks relative to their growth and defensive peers. International developed markets may contain more fertile ground for investing than the U.S. The U.S. dollar has struggled relative to foreign currencies over the last eight months, adding to the case for overseas returns.
Saira Malik is head of global equities at Nuveen.