THE NEXT FIVE YEARS. Chris Konstantinos, CFA

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1 US VS. INTERNATIONAL STOCKS: THE NEXT FIVE YEARS Chris Konstantinos, CFA Director of International Portfolio Management October 2014

2 THE MAGIC FORMULA Change Central Economic in Corp. in Market Bank Policy Momentum Earnings Prices 2

3 WHAT HAPPENED IN THE LAST FIVE YEARS

4 SCORECARD ON MONETARY POLICY Change CENTRAL BANK POLICY ECONOMIC MOMENTUM Central Economic In Corp. Market Bank Policy Momentum Earnings Direction US: Early to the party Quantitative Easing (QE) started in 2009 Japan: Abe takes power QE in early 2013 Europe: No QE yet, but ECB backstop in 2012 Emerging Markets: China stimulus in '08, but BRICs forced to tighten in 2011 due to inflation US: GDP bottomed 2010 Japan: big recovery 2013 Europe: recovery started in 2013 Emerging Markets: BRICS generally slowing since 2011 ANYONE NOTICE A PATTERN HERE? 4

5 EARNINGS RECOVERIES ACROSS MARKETS Best earnings recoveries are in US and Japan, where central banks have engaged in widespread QE More anemic recovery in Europe and emerging markets no QE Source: Thomson Reuters Datastream. Past performance is no guarantee of future results. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. 5

6 THE NEXT FIVE YEARS WHY INTERNATIONAL WILL LIKELY BEAT THE US GOING FORWARD

7 MIND THE GAP US stocks over +40% ABOVE their 2007 peak The catalyst to at least partially close this gap? relative central bank policy (remember the formula) Europe and Japan about 5-15% BELOW 2007 peak Past performance is no guarantee of future results. 7

8 ANOTHER WAY TO VIEW IT PRICE MATTERS Source: RiverFront Investment Group, calculated based on data from CRSP 1925 US Indices Database 2014 Center for Research in Security Prices (CRSP ), Booth School of Business, The University of Chicago. Data from Jan 1926 through August Past performance is no guarantee of future results. It is not possible to invest directly in an index. Source: RiverFront Investment Group, MSCI. Data from Jan 1970 through August Past performance is no guarantee of future results. It is not possible to invest directly in an index. Investments in international and emerging markets securities include exposure to risks including currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. The MSCI EAFE Index measures the equity market performance of developed markets, excluding the US & Canada. The index consisted of indices from 22 developed markets. 8

9 OUR VIEW OF THE FUTURE 1. Developed international beats everything else 2. International SMID echoes US experience 3. We would hedge euro and yen 4. Geopolitical risk not priced (long Norway) 5. Watch areas where reform is/isn t happening: Spain, Japan, Mexico actually happening India? too early to tell, but big potential China??? BIG if, but market is not pricing in reform Brazil, Africa, Turkey, Russia not happening Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Small- and mid-cap companies may be hindered as a result of limited resources or less diverse products or services and have therefore historically been more volatile than the stocks of larger, more established companies. 9

10 Director of International Portfolio Management Chris Konstantinos, ti CFA Chris serves as Director of International Portfolio Management with over 13 years experience as an equity sector analyst, portfolio manager, and portfolio risk manager across domestic and international markets. In addition, he serves on the firm s Operating Committee. Chris has been with RiverFront since the company s founding in He began his career in 2000 as a corporate finance analyst in the Technology sector at a predecessor to Wachovia Securities. He joined Wachovia s Advisory Services Group in 2002 as an equity strategist, and worked in various capacities within equity strategy and portfolio management until his departure in Chris earned his BS in Business Administration from the Kenan Flagler School of Business at the University of North Carolina at Chapel Hill. Chris received his CFA designation in 2013 and is a member of CFA Virginia Society. He has successfully completed the FINRA Series 7, 66, 86 and 87 licensing i exams. Chris is also a regular guest on the financial news channels (CNBC, Bloomberg) and is frequently quoted in the financial press. The Art: It s no wonder that Chris co workers are always humming familiar tunes. In his spare time, Chris is an accomplished songwriter whose songs have been featured in television, movies and radio across the U.S. and overseas. His music counts fans across various demographics, but none more energetic than his two young children. 10

11 DISCLOSURES * Information on charts from CRSP: Calculated based on data from CRSP 1925 US Indices Database 2013 Center for Research in Security Prices (CRSP ), Graduate School of Business, The University i of Chicago. Large Cap Universes used in the chart is defined by CRSP based on market capitalization. Used as a source for cap-based portfolio research appearing in publications, and by practitioners for benchmarking, the CRSP Cap-Based Portfolio Indices Product data tracks micro, small, mid- and large-cap stocks on monthly and quarterly frequencies. This product is used to track and analyze performance differentials between size-relative portfolios. CRSP ranks all NYSE companies by market capitalization and divides them into ten equally populated portfolios. Alternext and NASDAQ stocks are then placed into the deciles determined by the NYSE breakpoints, based on market capitalization. The series of 10 indices are identified as CRSP 1 through CRSP 10, where CRSP 10 has the largest population and smallest market-capitalization. CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent mid-caps and portfolios 6-10 represent small caps. RiverFront s Price Matters discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation. RiverFront Investment Group, LLC, is an investment advisor registered with the Securities Exchange Commission under the Investment Advisors Act of The company manages a variety of portfolios utilizing stocks, bonds, and exchangetraded funds (ETFs). Any discussion of the individual securities that comprise the portfolios is provided for informational purposes p only and should not be deemed as a recommendation to buy or sell any individual security mentioned. Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations. 11