International equity markets are having a great 2017 with many indices gaining +20% YTD. Some markets are absolutely on fire; EM Asia is up +39%, BRIC up +37% and broad EM up +32%. While this strong performance is certainly encouraging, our international equity team is a bit confused by the market’s reactions to various geopolitical events around the world. Whether it be the ongoing natural disasters or the ever-increasing political risk, the markets seem unconcerned…which is a bit concerning to us.
Consider, for example, this small sample of event risk that showed up during Q3:
- One of the strongest Atlantic hurricane seasons on record—and we have yet to see the results across the insurance and reinsurance companies.
- The on again/off again crisis in North Korea continues as Kim Jong Un lobs missiles over Japan and gets closer to having a weapon that could strike the United States mainland.
- In the U.S., President Trump’s machinations appear to be disrupting the normal business of running the country as he pushes an apparent vision of disengagement with the rest of the world, favoring a domestic U.S. focus. His ultimate goals are unclear as are the mechanisms he will employ.
- At the same time, Mueller’s probe grinds on in the background.
- The process of the UK’s departure from the EU remains unclear and contentious.
- India’s digestion of Modi’s cash ban remains mixed.
Despite all this, markets are blasé—even enthusiastic. Any worries about possible binary crises have been overridden by the “buy the dip” crowd and volatility, both experienced and forward-looking, has remained stubbornly near all-time lows. And all the while, valuations have marched higher.
The chart below highlights the P/E ratio (TTM) of the iShares MSCI ACWI Ex US ETF (ACWX) since January 2009. As we can see, the multiple has expanded considerably, growing from sub-8 to almost 18.
While valuations can remain extended for long periods of time, we must be cognizant that at some point, risk will matter once again. All in all, the international equity investors at R Squared Capital Management (former team Julius Baer/Artio Global) wonder how much longer valuations can stretch—and it certainly seems that the current calm may have a limited life span in an environment of heightened geopolitical risk.
To read our Q3 2017 Market Commentary in full, PLEASE DOWNLOAD IT HERE.
As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF RICHARD PELL
Richard Pell is CEO and Portfolio Manager at R Squared Capital Management.
Richard co-founded R Squared Capital Management in May of 2013. Prior to that, he was Chief Executive Officer and Chief Investment Officer of Artio Global Management LLC, a position he held since 1995 when the firm was part of the Julius Baer Group. Richard also served on the Board of Directors at Artio.
To read Richard's full bio or other RSQ team members, click here.