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Will gains cycle to overseas?
Old 10-29-2014, 02:01 PM   #1
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Will gains cycle to overseas?

With US QE ending, Europe just starting to consider QE now, is it possible US will have be pretty muted growth (coming off awesome market gains the last few years) while Europe will finally catch up? Europes indexes have severely lagged he US for the last 5 years, but with the QE inversion, I'm wondering if now is the time it will begin reverting to mean.

Of course I have a biased view, 45% of portfolio is foreign equities. I've thrown a ton of cash into foreign over the past couple years to keep my AA where I like it while US was taking off.

People are calling for poor global growth, kinda like some stories we heard about the US's future 5-6 years ago. Hmm...
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Old 10-29-2014, 02:10 PM   #2
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Maybe, but Europe seems to have lots of problems with capitalism and we cannot predict the future.

I don't see any reason to change one's asset allocation and to overweight Europe, but if one is now below their asset allocation target for Europe, I think it is a good time to rebalance into foreign equities. I have done so in the past 2 weeks.
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Old 10-29-2014, 03:14 PM   #3
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Quote:
Originally Posted by LOL! View Post
I don't see any reason to change one's asset allocation and to overweight Europe, but if one is now below their asset allocation target for Europe, I think it is a good time to rebalance into foreign equities. I have done so in the past 2 weeks.
Agree, I also got my allocation back up to target weight. First time in a long time, I'm using a hedged fund, as I suspect a European recovery will include a weaker Euro.
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Old 10-29-2014, 06:32 PM   #4
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The fed action would seem to strengthen the dollar to the euro. This would dampen returns since that 200 million euro company your mutual fund holds will be worth less in dollars tomorrow than it was yesterday.
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Old 10-29-2014, 08:13 PM   #5
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Thought about that a bit as well. Timing will be key-- hard to call it perfectly -- but I think the eurozone is still a year or maybe two from any substantial equity lift-off and economy that is able to absorb more risk.

As the Fed lowered rates and then came in with round after round of quantitative easing - money not only stokes the US economy but also flows overseas to emerging markets, to Europe, Japan, China, etc. As the fed ends QE... and eventually as the fed actually raises rates, all economies will slow. That's why i think the fed does nothing more for at least a year...wait to see how things develop. Risks in the system are already apparent from the end of QE -- some examples: China - GDP slowing to about 6.5% (dont ever believe china official numbers) and what's more concerning is inflation is at a lowly 1.6% PPI. That's not healthy for emerging markets- it's bordering deflation. Oil prices at 4 year lows dont help the inflation picture either. It's a clear indication of a stagnating economy.

Offsetting the stagnating economy will be likely stimulus to come - as you note, some form of QE in eurozone, very likely a stimulus in China, and keeping interest rates flat in USA along with cheap oil (which is like a stimulus/tax reduction for the consumer, which comprises 70% of the US economy)

End result of the plusses and minuses is a situation that's probably not a lot different from today for the next 12-18 months. Not a big reason to get excited yet about eurozone equities / valuations especially with the risk of a deflationary cycle. W

ill non-US equities eventually come back? yes...always a cycle. Keep your asset allocation in tact, now is good time to rebalance...see what happens.

Myself - I am couch potato now - SPY, DIA, VTV, VTI for domestic equities and VXUS for ex-USA equities.... have been adding more to VXUS on the recent overall non-USA weakness ..... to get back to my general asset allocation....60% domestic, 20% foreign 20% cash.
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Old 10-29-2014, 09:50 PM   #6
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Momentum argues for the US over international. I would wait for a turn.
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Old 10-29-2014, 10:03 PM   #7
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I've been slowly increasing the international allocation yearly (4 years? I forget) since the US has become more expensive, not to much payoff.
Although SE Asia has done pretty well and a couple others.
I did the same with Europe and China back in 1999 and 2000, and it took a good while but paid off. Not that History repeats. I will be putting gains into international slowly as long as the comparative valuations remain striking, to maintain US versus foreign allocation. I think Europe has lower to go, so I'll take incremental positions.
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Will gains cycle to overseas?
Old 10-30-2014, 01:03 AM   #8
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Will gains cycle to overseas?

My allocation to international equities went low enough to trigger some rebalancing recently, so I did some buying. I agree that momentum seems to be against international at the moment, and I see the euro go lower. But who knows.
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Old 10-30-2014, 10:31 AM   #9
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The recent correction did something interesting: The euro took a hit of ~5% as well as stocks, which means in euro terms I am with my global fund (vanguard VT) still at break-even.

My European stocks took a nose dive though.

Waiting for the cycle to turn indeed in favor of EU companies, but it might not happen. EU could end up as Japan.
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Will gains cycle to overseas?
Old 10-30-2014, 11:10 AM   #10
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Will gains cycle to overseas?

I think the common knowledge right now is everyone should have their money in the us and out of europe, because that where the growth is.

I find the herd is often surprised and changes direction later.

Emerging markets i find vey scary still, but i'm sticking to overweight, those markets skyrocket or bottom overnight.

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Old 10-30-2014, 11:38 AM   #11
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It appears that the US equities are recently doing better to a large extent because of the dollar strength. Below is a chart showing US Large Value (Vanguard VIVAX), International Large (VFWAX), and the trade weighted dollar.

Good luck getting ahead of the currency markets in your guesses.

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