Maximize Diversification

Maximize Diversification

Global equity markets have staged an impressive recovery from the massive sell-off at the beginning of 2020. Although this is certainly welcome news, we’ve witnessed a small group of growth-oriented technology stocks vastly outperforming during the global pandemic. While further upside might remain, the health of the market appears somewhat overstated leaving markets and investors vulnerable to pullback in this sector.

Technology Has Had an Outsized Impact on Market Returns YTD

Source: Morningstar Direct as of October 2, 2020 in USD. For illustrative purposes only. One cannot invest in an index.

 

Market Concentration a Global Phenomenon

Sector concentration has become a global phenomenon, reminding us of the importance of actively seeking out opportunities to diversify amongst countries and across sectors as technology stocks now make up over 20% of global markets. In fact, according to research from Bank of America, the total market capitalization of U.S. tech stocks reached $9.1 trillion USD in August, greater than the entire European market (including the UK and Switzerland) which was valued at $8.9trillion USD.

Global Markets Sector Breakdown

 

Source: MSCI as of Auguts 31, 2020. MSCI World IMI Index in USD

 

Regional Asset Class Performance Divergence

Global diversification has long remained an important strategy to uncover opportunities and manage risk. Diversifying across multiple regions has arguably become more important given the range of impacts COVID-19 has had on different asset classes and countries resulting a divergence in performance.

At the same time, there is growing demand for sustainable investing strategies as an additional way for investors to generate returns and build more resilient portfolios. Companies that are well positioned on sustainability themes tend to be at the forefront of innovation and the market is more likely to value this positioning in periods of crisis.

Asset Class YTD 1 Year
Fixed Income
Global Sovereign 7.1% 6.8%
Global Investment Grade 5.7% 6.2%
Global High Yield 0.9% 4.3%
Emerging Markets -0.5% 1.3%
Canadian Bonds 5.3% 6.2%
Equities
U.S. 5.1% 14.5%
Canada -5.9% -0.9%
Emerging Markets -1.2% 10.5%
Asia 1.6% 11.2%
Europe -8.8% -0.8%

Source: Morningstar Direct as of September 30, 2020 in USD. Fixed income represented as follows: Global Sovereign = FTSE World Government Bond Index, Global Investment Grade = BBgBarc Global Aggregate TR USD Index, Global High Yield = BBgBarc Global HY Corp TR USD Index, Emerging Markets = JPM EMBI Global Diversified TR USD Index, Canada = FTSE Canada Universe Bond Index. Equities represented as follows: U.S. = S&P 500 NR USD Index, Canada = S&P/TSX Composite TR Index, Emerging Markets = MSCI EM NR USD Index, Asia = MSCI AC Asia Pacific NR USD Index, Europe = MSCI Europe NR USD Index.

Valuations Outside of North America Are Looking More Attractive

On a relative basis North American stocks, driven largely by a small number of technology companies, are looking increasingly expensive.  With a global approach, investors may be better positioned to capture additional opportunities for outperformance while reducing risks associated with  being overexposed to markets that lag or are impacted by increasing COVID-19 infections.

Forward PE Ratios For Major Regions

Source: MSCI as of August 31, 2020 in USD. USA = MSCI USA Index, Japan = MSCI Japan Index Europe =  MSCI Europe Index, Emerging Markets = MSCI Emerging Markets Index, MSCI UK = MSCI United Kingdom Index.

Uncertainty and the resulting volatility will likely remain high as markets and economies continue to grapple with the impact of the global pandemic. Taking a global view, incorporating a range industry and asset class exposures can help manage volatility and build more resilient portfolios.

 

Maximizing Diversification is Key to Building Resilient Portfolios

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cdn. Stocks 24.08% EM Bonds 7.35% European Stocks 19.12% U.S. Stocks 31.55% U.S. Stocks 13.00% EM Bonds 1.18% Cdn. Stocks 25.42% EM Stocks 37.28% Global Gov't Bonds -0.84% U.S. Stocks 30.70%
EM
Stocks 
18.88%
Cdn. Bonds 7.02% Global HY Bonds 18.91% European Stocks 25.23% EM Bonds 7.43 U.S. Stocks 0.75% Global HY Bonds 13.99% Asian Stocks 31.67% Global IG Bonds -1.20% Cdn. Stocks 29.42%
Asian Stocks 
17.02%
Global Gov't Bonds 6.35% EM Stocks 18.22% Balanced Portfolio 12.64% Balanced Portfolio 2.73% Asian Stocks
-1.96%
U.S. Stocks 11.23% European Stocks 25.51% Global HY Bonds -3.47% European Stocks 23.77%
U.S.
Stocks
14.37%
Global IG Bonds 5.64% EM Bonds 17.44% Asian Stocks 11.97% Cdn. Stocks 1.41% Balanced Portfolio -2.68% EM Stocks 11.19% U.S. Stocks 21.10% EM Bonds -4.26% Asian Stocks 19.36%
Global HY Bonds 13.84% Global HY Bonds 2.56% Asian Stocks 16.78% Global HY Bonds 8.44% Global IG Bonds 0.59% European Stocks -2.84% EM Bonds 10.15% Balanced Portfolio 17.34% U.S. Stocks -4.94% Balanced Portfolio 18.69%
Cdn. Bonds 12.62% U.S. Stocks 1.47% U.S. Stocks 15.22% Cdn. Stocks 5.89% Global HY Bonds 0.20% Global IG Bonds -3.15% Balanced Portfolio 5.55% Cdn. Stocks 16.77% Balanced Portfolio -6.13% EM Stocks 18.42%
EM Bonds 12.24% Balanced Portfolio -2.15% Balanced Portfolio 11.41% Global IG Bonds -2.60% Asian Stocks 0.00% Global Gov't Bonds -3.57% Cdn. Bonds 5.31% Global HY Bonds 10.29% Cdn. Bonds -6.97% EM Bonds 15.04%
Balanced Portfolio 9.90% Cdn. Stocks -10.92% Cdn. Stocks 9.62% EM Stocks -2.60% Cdn. Bonds -0.20% Global HY Bonds -4.94% Asian Stocks 4.89% EM Bonds 10.26% Asian Stocks -13.52% Global HY Bonds 13.42%
Global IG Bonds 5.54% European Stocks -11.06% Cdn. Bonds 5.95% Global Gov't Bonds -4.00% Global Gov't Bonds -0.48% Cdn. Bonds -13.68% Global IG Bonds 2.09% Cdn. Bonds 9.72% EM Stocks -14.57% Cdn. Bonds 12.56%
Global Gov't Bonds 5.17% Asian Stocks -15.11% Global IG Bonds 4.32% EM Bonds -5.25% EM Stocks -2.19% EM Stocks -14.92% Global Gov't Bonds 1.60% Global Gov't Bonds 7.49% European Stocks -14.86% Global IG Bonds 6.84%
European Stocks 3.88% EM Stocks -18.42% Global Gov't Bonds 1.65% Cdn. Bonds -7.40% European Stocks -6.18% Cdn. Stocks -23.55% European Stocks -0.403% Global IG Bonds 7.39% Cdn. Stocks -16.41% Global Gov't Bonds 5.90%

Source: Morningstar Direct as of September 30, 2020 in USD. Global Gov't Bonds represented by FTSE WGBI USD Index, Global IG Bonds = BBgBarc Global Aggregate TR USD Index, Global HY Bonds = BBgBarc Global HY Corp TR USD Index, EM Bonds = JPM EMBI Global Diversified TR USD Index, Cd. Bonds = FTSE Canada Universe Bond Index, U.S. Stocks = S&P 500 NR USD Index, Cdn. Stocks = S&P/TSX Composite TR Index, EM Stockss = MSCI EM NR USD Index, Asian Stocks = MSCI AC Asia Pacific NR USD Index, European Stocks = MSCI Europe NR USD Index, Balanced Portfolio = 60% MSCI ACWI NR Index and 40% BBgBarc Global Aggregate TR Index.

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