A client mentioned recent political developments abroad, and asked if I was considering increasing our international equity exposure going forward.
Here's my brief answer:
"Funny you ask. I’ve yet to increase our international target weightings (lowered them in 2018), but I’m beginning to warm up to the possibility as we move into next year, but not because of the latest political trends. Those are a net negative.
In fact, I traded Brazil pre-election on the prospects of Bolsonaro taking it. However, the more I looked into the man himself the less I liked Brazil’s prospects. Frankly, he’s another unpredictable extreme populist. EWZ is now on my list of potential shorts.
Merkel’s party’s defeat over the weekend was not good news for Europe going forward. However, while the AfD party gained, so did other pro-EZ parties. Merkel’s demise does not spell the end of Europe as we know it just yet. And that’s good news. Europe’s morning rally is on data and bank earnings.
My growing international optimism stems from:
1. Attractive valuations
2. Re: Europe, a softer (than the Fed) ECB, a still growing (albeit at a reduced pace) economy, and prospects for a smooth Brexit.
3. Re: Asia, near-term China is back in stimulus mode, that, plus a softening of the trade rhetoric could be huge for Asian equities near-term. Plus, the TPP (without the US) is now being finalized. Japan and China (believe it or not) are about to begin working together on dozens of infrastructure projects.
4. Latin America is a whole other conversation (not all bad necessarily) altogether.
Longer-term, while the latest political trend is concerning, but not yet consuming, the global economy looks okay and foreign equities look relatively cheap. And I don’t see huge upside risk to the dollar, the opposite perhaps over time.
A protracted trade war would do great harm to my thesis, however."
P.S. Any optimism spawned by Angela Merkel's pending exit revolves around the notion that the Germany of the next few years will be less austere in its approach to the Eurozone. Yes, the market loves easy money! However, easy money -- for longer than necessary -- can come with big price tags (bursting bubbles) further down the road.