- Overweight the U.S. - With the economy continuing to improve and monetary policy less accommodative, we may have reached the point where liquidity no longer trumps fundamentals and momentum investing no longer leads. In this environment, cyclical sectors look attractive, especially those that are considered "deep value."
- Neutral weight Europe - Europe continues to be buffeted by both positive and negative influences. While economic data are improving and financial sector risk has fallen, the recovery is still ongoing. I believe the same investment themes that succeeded in the U.S. during the past five years may generate above-average returns in Europe: The Dogs of the Dow strategy (investors own the 10 highest-yielding stocks in the Dow Jones Industrial Average and rebalance every year) and the S&P 500 Dividend Aristocrats strategy (investors own companies that have increased their dividend every year for the past 25 years). Overall, I do favor a "Dogs of Europe" or a European "aristocrats" approach to investing in this region, keeping in mind that these strategies carry their own risks.
- Overweight Japan - Negative sentiment seems to be plaguing Japanese equities, as investors have been disappointed by recent inaction by the Bank of Japan (BOJ). However, I believe the downturn may be temporary.
- Underweight emerging markets - Emerging market equities have rallied since their February low, but I believe the upside is likely to be limited. In my view, China has more work to do to correct the overinvestment and credit imbalances of the past few years. The asset class as whole is a mixed bag of high and low quality; selectivity is warranted.
Expect bifurcated performance
As we begin the second quarter, the landscape appears to be shifting. Global monetary policy is no longer synchronized with U.S. monetary policy, which is becoming less accommodative. Europe's monetary policy remains moderately accommodative, characterized by more talk than action. The BOJ, however, remains highly stimulative. In emerging markets, some countries are in a tightening mode, while others continue to ease conditions by lowering interest rates.
In my experience, when global monetary policy is disconnected, regional equity returns diverge, resulting in big gains for some markets and big losses for others. This greater range of outcomes could make asset allocation more challenging, as the losers typically offset the gainers, reducing a diversified portfolio's overall returns.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer's board of directors and the amount of any dividend may vary over time.
Past performance is no guarantee of future results. Diversification does not guarantee a profit or eliminate the risk of loss.
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Disclosure: The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed are those of the author(s), are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.