North American equities led the way in 2016, providing double digit returns and bolstering investor confidence. As expected, the recent strength has naively led investors to flock into US equity funds in what may possibly be the tail end of US equity dominance over global equity markets.

This new wave of investor enthusiasm will inevitably pressure Investment Advisors to tilt more aggressively toward North American equities in the coming year. In this analysis we examine where US equity markets lie in terms of both cyclicality and valuation against other global equity markets, and assess where the best opportunities may lie going forward. We hope this article arms Advisors with the tools and data necessary to help their clients avoid the typical behavioural flaws that lead to poor timing and poor long-term returns. We make the case that this is best achieved via a thoughful, globally-diversified asset allocation.

ONE MARKET TO RULE THEM ALL

If you are a forward-thinking Advisor with a balanced and well diversified global portfolio, you have not been rewarded for your diligence and thoughtful diversification over the last 3, 6, and 9 year periods. In fact, there’s only been one game in town: US Equities. This has been an incredibly unsusual time for global markets as pretty much any other asset class has had low or negative returns since the Housing Bubble burst.

To illustrate, let’s start by analysing a wide variety of asset classes over the most recent 3-year period. Figure 1 shows that the only market that has delivered material returns in US dollar terms has been US equities. While US Treasuries also produced positive returns, they trailed US equities by a substantial margin. Note that Canadian equities delivered negative returns during this period.

Next, we examine the most recent 6-year period. What we observe is the same market structure, but with an even more pronounced dynamic, as US equities annualized at over 12%, beating the next best asset class (again, US Treasuries) by over 7% per year. And yet again, Canadian equties delivered negative returns.