Is It Finally Time to Look Beyond US Large Caps?

The last eight years have been a great run for investors, with valuations climbing higher and the major indexes tripping over themselves to set new records. As of this month, the second longest bull market in history is only 10 months shy of the all-time record, which is starting to make some investors nervous. Over the last few years just tracking a major benchmark with a low-cost, plain vanilla ETF has yielded respectable returns. But when the market correction arrives, a more tactical approach can deliver considerably more value.

The start of the fourth quarter is a good time to identify some of the opportunities investors might consider pursuing, both domestically and internationally — starting with Europe.

Strong Fundamentals and Solid Growth in Europe

Right now many portfolios are overweighted with large-cap U.S. equities, which is understandable, since that’s where some of the best returns have been found. But for those investors who believe the bull may be on its last legs, the eurozone may be a good place to look for new opportunity. For example, the region’s top financial names have solid fundamentals and have been demonstrating global growth resulting in great price appreciation in the first three quarters of this year.

Europe has had 17 consecutive quarters of positive growth and is enjoying year-over-year GDP growth of 2.3%, driven by strong exports and consumer confidence. Manufacturing numbers throughout the region have been high, particularly in Germany, the largest economy in the eurozone.

Fiscally, the region is also attractive as gradual quantitative easing by the European Central Bank has been beneficial to the euro regional currency and will continue to be a tailwind to the eurozone.

The manufacturing Purchasing Managers Index, used to gauge economies’ productivity, continues to trend higher in the eurozone, hitting multi-year highs.

China’s a Mixed Bag

Investors have expressed concerns over the near- and midterm performance of the CSI 300 China A Shares Index, but this index is up over 23% year to date. There have been numerous indicators of the region’s positive performance this year, including an influx of capital from money managers and other investors. At the same time, there has been considerable chatter about the lack of hedging or inverse tools available in that marketplace should a pullback occur.

This is reminiscent of the situation several years ago, when there seemed to be never-ending rallies in the CSI 300, followed by a very sharp pullback and short squeeze in the various underlying products that investors look to short.

China economic indicators are showing signs of a slowdown in recent months.

Caution of course is required when making investment decisions, and it’s always a question of which way the market will turn.  China has failed to hit analysts’ estimates on exports, industrial output and retail sales. And last month the S&P downgraded China’s sovereign credit rating for the first time this century, explaining that credit growth is still too fast while risk growth is lagging.

The Chinese counter is that this analysis ignores certain fundamentals. GDP growth, at 6.8%, is exceeding expectations. Whether the country will stay on that kind of growth track is the big unknown, but so far investors seem to be maintaining their long positions, although that could change if the 19^th Communist Party Congress later this month addresses reform as part of its agenda.