We spent most of last week at the annual Schwab IMPACT Conference. This has become one of the leading (perhaps the leading) conferences in the investment industry. It provided the opportunity to engage with many of the managers we use in client portfolios and several others that we’ve been contemplating using. The speakers at the conference are among the leading thinkers and practitioners in the industry. The conference provided a wonderful opportunity to hear fresh ideas and challenge the way we’ve been thinking about client portfolios. In some cases we will probably adjust our thinking. In other cases our convictions have been strengthened.
Not surprisingly, the presentations were chock full of charts. Two that stuck in our minds came from a presentation by Rob Arnott of Research Affiliates, Inc. Rob argued persuasively that emerging markets stocks are positioned to outperform U.S. stocks by a significant margin over the next ten years. (He was careful NOT to make any predictions about what might transpire in the short term!) His argument was very simple:
- CHART 1: one of the best measures of “valuation” (whether stocks are cheap, expensive or somewhere in between), “Shiller’s CAPE” (cyclically adjusted price-to-earnings), shows a massive divergence over the last several years between the U.S. and emerging markets. At recent prices, US CAPE is much higher than EM CAPE.
- CHART 2: Shiller’s CAPE has been highly predictive of forward ten-year returns. When EM CAPE is significantly lower than US CAPE (ratio is significantly less than 1.0), EM stocks outperform US.
- CONCLUSION: Emerging markets stocks have a dramatically lower CAPE at recent prices and are therefore very likely to generate better returns than U.S. stocks over the next ten years.
We’ll share more from the conference over the next several weeks. In the meantime have a look at the charts below.
Jay and Brad