Go Global Now To Manage Risk
Its time: Go global now
By Steven Wieting, Citigroup's Global Chief Investment Strategist
The most important opportunity for investors in 2018 is going global. A fully global asset allocation may potentially generate a higher long-run return while also seeking to minimise risk.
Just as synchronous global expansions like the one we have experienced for the past nine years are rare, so too are global market declines, as we experienced in the Global Financial Crisis.
Experiences like the GFC tend to make investors scared, and they retreat to markets they know best and perceived safe havens.
And in good times some markets will outperform, as has been the case with United States equites over recent years.
These events make easy a shift in investor mind set towards herd mentality, where going with the majority seems the safest option and taking a more long term view becomes a secondary concern.
But as can be seen in the tables below, taking a long term perspective and spreading your risk across geographic and asset class boundaries is historically the best platform for performance.
Regardless of your 'home' market, moving away from regionally concentrated allocations full of idiosyncratic local risks is wise.
Investors should therefore take the opportunity to diversify their portfolio risk by allocating more to cheaper asset classes and markets worldwide. These include higher yielding fixed income investments. Our key message for 2018 is therefore to 'go global now'.
Looking at the period between 1952 and 2017, a globally diversified multi-asset class allocation would have produced an annualised total return 1.3 per cent above that of an equity and fixed income allocation entirely drawn from the best-performing region: the US. What is more, the global allocation's annualized volatility would have been 1.8 per cent lower than the US-only allocation.
The long-term outperformance of global allocations is no coincidence. Economic dislocations and geopolitical shocks that strike multiple regions simultaneously are relatively rare, the Global Financial Crisis of 2007-09 being one example.
Such episodes are more frequently focused upon a particular region, such as the Asian crisis of 1997-1999 or the European sovereign crisis of 2012-2013.
According to our analysis of the four main regional economic crises of recent decades, financial markets outside those regions were negatively impacted, while economies were generally not. Those external markets subsequently recovered much faster than those of the affected regions, outperforming them by an average of 33 per cent in the year after the onset of a regional recession.
Global Equity performance amid regional crisis
|Affected region's worst monthly return (%)||Global vs local performance, 1yr after regional recession (%)|
|Latin America 1998||-34.7||57.1|
|Commodities Latin America 2015||-10.8||29.0|
Source: Bloomberg, as of 1 Nov 2017. Returns were measured by the corresponding MSCI Indices for MSCI AC Asia, Latin America, and Europe. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only. Past performance is no guarantee of future returns. Real results may vary.
Having a globally diversified portfolio is intended to mitigate the effects that periodic regional difficulties can have upon performance.
The continued second wind for the global expansion that we expect in 2018 reinforces our case for going global now.
With many regional economies worldwide likely to experience faster growth, globally diversified investors may be better placed to experience robust returns in both the coming year and, more importantly, over the long run.
Economic Growth Driven by Second Wind
By Steven Wieting, Citigroup's Global Chief Investment Strategist
We have experienced nine years of a bull market and some observers believe is about to end in a significant correction. We agree it's an old business cycle but the world economy has drawn its "second wind," which we expect to sustain positive investment returns in 2018.
Whereas the acceleration in growth in 2017 surprised Investors and propelled markets, the further pick-up we envisage over the coming year is likely to drive smaller market gains.
Nevertheless, we see potentially rewarding opportunities in particular markets and investments. Outside the US, for example, equity valuations are significantly lower and corporate earnings could again record double-digit gains in the next 12 months.
Drivers of the second wind
Growth is broadening out across global regions, with stronger activity in emerging markets as well as in the US. This broadening effect is feeding into higher corporate earnings around the world, which in turn has the possibility of fueling further gains in global equities.
Inflation worldwide remains low, even in the economies with the most advanced business cycle recoveries. This suggests that the global economy is not overheating as it tries to meet demand. As such, there is still no need for the sort of aggressive monetary tightening that has helped terminate many past expansions.
Central banks step back
Together, broadening economic growth and tame inflation can drive the global expansion forward. By contrast, we expect that central banks will step back and provide less fuel in the form of cheap money in 2018 and beyond. Central banks are set to reduce monetary easing in some parts of the world while modestly tightening policy in others. The US Federal Reserve has already announced that it is to shed $US300bn of its $US4.2tr portfolio of bonds over the next 12 months. The European Central Bank (ECB) is cutting its monthly bond purchases from €60bn to €30bn through September 2018.
Between them, the Federal Reserve's and ECB's planned reductions in asset purchases will require other investors to purchase $US850bn more sovereign and other investment-grade securities this year. Offsetting this reduction in liquidity, we expect world GDP to grow by $US6tr.
Despite the significant offset, previous shifts in monetary policy in recent years have triggered a rise in market volatility and we believe 2018 may see the same. Geopolitical surprises could also contribute to volatility.
The weakening of the US dollar in 2017 helped to drive substantial gains in emerging market assets.
Many investors are now positioned for further dollar weakness in 2018. We believe they may be surprised once more, as they were in 2017.
The dollar could well consolidate for a time before resuming its downtrend in a future Fed easing cycle after 2018. Despite our expectation of a more range-bound US dollar in the year ahead, we continue to emphasize the case for emerging markets both for 2018 and beyond.
The value of going global
Looking at the period between 1952 and 2017, a globally diversified multi-asset class allocation would have produced an annualised total return 1.3 per cent above that of an equity and fixed income allocation entirely drawn from the best-performing region: the US. What is more, the global allocation's annualised volatility would have been 1.8 per cent lower than the US-only allocation.
Global equity return estimates 20181
|MSCI Global ex-US||9%|
|MSCI Emerging Markets||12%|
|Euro Stoxx 600||12%|
Global Currency-hedged fixed income return estimates 20182
|Euro Area Aggregate||-1%|
|Emerging Market Sovereign||5%|
1 and 2 Source: Citi Private Bank, as of 17 Nov 2017. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Note: 'Global Aggregate' is Citi World Broad Investment Grade Index, 'US Aggregate' is Citi US Broad Investment Grade Index, 'Euro-Area Aggregate' is Citi Euro Broad Investment Grade Index, 'Emerging Market Sovereign' is Citi Emerging Markets Sovereign Bond Index (ESBI), and ‘High Yield Corporate’ is Citi US High Yield Market Index.
This document is distributed in Australia by Citigroup Pty Limited ABN 88 004 325 080, AFSL No. 238098, Australian credit licence 238098. Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. Before acting on this advice you should consider if it's appropriate for your particular circumstances. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product, and consider if it’s suitable for your objectives, financial situation, or needs. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance. Investment products are not available to US people and may not be available in all jurisdictions.