A Conversation with Justin Kariya
"CLIM has a positive view on the outlook for international equities particularly compared with US alternatives. Market volatility remains elevated as investors navigate diverse macroeconomic crosscurrents. However, we see emerging opportunities and focus on three key themes.
First, the US dollar appears to be in the early stages of a long-term bear market. The drive for diversification away from US assets is unlikely to be reversed by near-term policy announcements. Dollar mean-reversion implies 10-20% depreciation in the US real broad effective exchange rate. This is typically supportive for outperformance of international equities.
Second, AI continues to be an important long-term theme, transcending short-term policy noise. Value is beginning to emerge in non-US countries most aligned with advanced semiconductor production.
Third, while US trade policy may become less restrictive as negotiations evolve, global activity will likely suffer from delayed business decisions on hiring and investment. A slower US growth backdrop remains our base case for this year while non-US growth could surprise to the upside.
Key Factors Influencing Global Positioning
CLIM is overweight Emerging Markets, Japan, and within Europe, the Netherlands to reflect our positive view on semiconductor-driven demand. Overall, we are neutral Europe and underweight to Canada, Australia, and the UK.
Emerging markets remain leaders in the production of advanced semiconductors and high-bandwidth memory chips. In addition, they are trading at a wider discount to ACWI than their five-year average and are expected to see robust earnings growth.
Japan is among the countries most likely to secure a favorable trade deal with the US while ongoing corporate governance reforms seek to unlock shareholder value. The Eurozone has faced multiple headwinds but equity valuations remain cheap despite recent strength, and there are several potential upside catalysts. UK valuations remain cheap, but they are likely to stay that way while Australia and Canada are relatively expensive and have unfavorable sector compositions for the current environment.
How Investors Should Think about Diversification
CLIM has always advocated that investors diversify their portfolios by including international stocks. The extended period of US equity outperformance over the last decade has challenged the merits of that view as the period of low interest rates supercharged US growth stocks.
The current environment, characterized by higher inflation rates and higher interest rates, is likely to level the playing field more evenly and allow value stocks which are more prevalent in overseas markets to diversify portfolios and improve risk adjusted returns."
This content is intended to highlight current market conditions at the time of writing and should not be construed as investment advice or a recommendation to buy or sell any security.
