History shows that returns are greatest when capital is scarce. But investors need to also realize that risks escalate when there is a glut of capital.
Valuation alone may not be a reliable short-term timing indicator, but crowded and overvalued markets have a greater risk of disappointment. Today, investors are generally ignoring global stocks and have increasingly crowded into a handful of very expensive US stocks. Because valuation is a prime determinant of long-term returns, these ignored market segments stand to benefit as sentiment begins to normalize.
Investors are crowding US equities
Many portfolios reflect what has worked best in the last decade rather than what may work going forward. Chart 1 shows the average equity positioning of tactical and strategic asset allocation strategies at six selected large investment firms. Relative to the global equity market, these strategies are significantly overweight the US at the expense of International Developed and Emerging Market stocks.
RBA’s Global Equity ETF Strategy appears positioned dramatically different than consensus. We are meaningfully underweight the US and see significant opportunities outside the US.