Chart of the Week

Sources: International Monetary Fund, as of April 30, 2019. Actual data through December 31, 2018; forecast data through December 31, 2024. Dotted lines represent International Monetary Fund estimates for years after 2018. For illustrative purposes only. Excerpt from “2019 Capital Market Assumptions: Strategic Asset Allocation Recommendations” (July 2019).

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As the chart shows, the percentage of economic activity outside the U.S. has been growing over time. Global economic cycles that differ from U.S. economic cycles create the potential for investors to earn positive international (developed and emerging markets) returns, even when the U.S. economic cycle winds down.

In our view, investors should consider maintaining exposure to international markets to help boost return potential over a full market cycle. At the same time, we foresee that the historical ebb and flow in the U.S. dollar’s value could generate some periods of dollar strength that may detract from international returns. On balance, we believe the long-term opportunity to exploit broadening and widespread international growth justifies the potential currency risk within a diversified portfolio.

While our strategic asset allocations still favor U.S. equities over international, we believe that global economic performance that is unsynchronized with the U.S. economy may produce opportunities to earn positive international returns when the U.S. economy struggles. If international economies succeed with economic reforms, their markets may merit expanded allocations in the coming years.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets.

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