What We’ve Seen
- U.S. revenues and earnings outpaced International in every quarter of 2018, helping drive U.S. stocks ahead of their non-U.S. counterparts by 8.79%. Thanks to a 2.83% return compared to a 1.51% return in April, U.S. companies continue to outperform International ones bringing the year-to-date advantage to 5.40% and the trailing one-year spread to a whopping 15.53%. Over the last ten years, the U.S.’s 14.89% return has outpaced International by 7.85% annualized as the U.S. faced significantly less headwinds than Europe, Japan and Emerging Markets all did at various times.
- This drubbing by the U.S. has helped drive the U.S. from representing 35% of the world’s market capitalization to 46% today. On the other hand, non-U.S. stocks now comprise 54% of the world’s market capitalization versus 65% ten years ago. Contrarians will see this as another sign, along with various valuation multiples, that the U.S. has outperformed for far too long and is ripe for a correction, but neither the pace nor path of this outperformance necessarily has to end simply because the calendar turns to another month.
- The above stat epitomizes that the investor demand for U.S. exposure relative to International is quite evident. In addition to the sizable performance story, the continued strength in the U.S. dollar and large interest rate differentials in favor of the U.S. are two additional signs suggesting U.S. overweights remain consensus and may continue to be the case.
The Weights of U.S. and International are Slowly Converging
Source: FTSE Russell, as of April 30, 2019. U.S. represented by the FTSE USA Index and International represented by the FTSE All-World ex US. Past performance is not indicative of future results. One cannot invest directly in an index.
Money in Motion
- When it comes to investor positioning, rolling 3-month flows have ranged from over $48.3 billion in favor of International ETFs to $22.9 billion in favor of U.S. ETFs highlighting investors shifting preferences in the face of conflicting macro headlines. The spread has been $39.9 billion over the last four months, still relatively large, but modest compared to the $71.3 billion for the full twelve months as many big picture issues impact the U.S. and non-U.S. to similar degrees, such as the ongoing China-U.S. trade talks.
- In April, flows have been on the top end of these ranges and above one positive standard deviation in favor of the U.S. with U.S. ETFs seeing $20.4 billion of inflows and International ETFs seeing $125.4 million of outflows over the last three months.
Flows into U.S. ETFs are Well Ahead of International
Source: Bloomberg Finance, L.P., as of April 30, 2019.
Data represents the relative net flows of U.S.-listed U.S. Equity ETFs and International Equity ETFs specifically targeting exposure to U.S. and international markets, respectively. For example, when the blue line is positive, U.S. equities gathered greater flows than International equities. On the other hand, when the blue line is negative, U.S. equities gathered less flows than International equities.
- Thanks to renewed accommodative monetary policy in the U.S., the Eurozone and Japan, the concerns that the global economic slowdown could negatively impact markets have abated, helping to improve the overall macro backdrop. However, China and the U.S.’s latest Purchasing Manufacturing Index data disappointed expectations furthering the case that an all-clear signal has yet to emerge even as manufacturing remains in expansion. In Europe, Italy’s flirting with a technical recession and there are fears that Germany could end up there. Japan’s recent data has been less than inspiring as well, with economic surprises remaining stuck in negative territory. On the positive side, Brexit has been pushed out and fallen out of day-to-day investor concerns, even though the economic picture in the United Kingdom remains muddled.
- From an earnings perspective, while still tilted toward downgrades, three-month earnings revision ratios as compiled by BofA Merrill Lynch have improved across regions, which is a welcome sign considering returns this year have been primarily driven by multiple expansion. However, the U.S. remains in the driver’s seat here as it sports the highest ratio among its regional peers indicating that the catalyst for a reversion to the mean benefiting non-U.S. stocks may remain elusive.
- Market participants should also keep an eye on several macroeconomic releases in the coming days and weeks for further confirmation of a supportive backdrop for further U.S. upside. Thursday sees the Bank of England Bank Rate decision and Inflation Report along with Durable Goods and Factory Orders in the U.S. On Friday, we have the U.S. Change in Nonfarm Payrolls figure for April, which will give insights in the labor markets along with Eurozone inflation. Next Thursday and Friday will bring inflation data for the U.S., which may offer some guidance on what may be next for the Federal Reserve.
Earnings Revisions Remain Better in the U.S.
Source: BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES, as of April 30, 2019.
- The Direxion FTSE Russell US Over International ETF [RWUI] provides investors with increased exposure to the U.S. relative to international markets and stands to benefit should the U.S. continue to outperform International markets thanks to better than expected Q1 earnings and the Fed remaining sidelined.
- If investors wish to decrease the weight of the U.S. in their portfolios and position for U.S. underperformance, the Direxion FTSE Russell International Over US ETF [RWIU] offers a direct means to overweight International countries, such as Japan, the United Kingdom, France, China, and Switzerland.
- Russell 1000® Index: The Russell 1000 Index consists of the largest 1,000 companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. companies.
- FTSE All-World ex US Index: The FTSE All-World Excluding United States Index is a free float market capitalization weighted index. FTSE All-World Indices include constituents of the Large and Mid-capitalization universe for Developed and Emerging Market segments.
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Direxion Relative Weight ETF Risks: Investing involves risk including possible loss of principal. The Funds’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in or shorting securities or other investments. Investing in, and/or having exposure to, foreign instruments may involve greater risk than investing domestic instruments. The Funds’ returns and net assets may be affected largely by fluctuations in currency exchange rates, political, diplomatic or economic conditions and the regulatory requirements of foreign countries which typically are not as strict as in the U.S. There is no guarantee that the returns on the Funds’ long or short positions will produce high, or even positive returns and a Fund could lose money if either or both of the Fund’s long and short positions produce negative returns. Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.
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