Opportunities on the Horizon: Investing Through a Slowing Economy

overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 7 Adding non-US debt exposure The peaking US dollar, now near its highest level in 50 years, is likely to begin a gradual, uneven decline. This trajectory suggests that credit- worthy, non-US sovereign debt could be a solid addition to fixed income holdings (See As US dollar dominance ends, currencies may drive returns ) . Not only may these securities offer higher yields, but the falling dollar may provide a higher total return to maturity. Investing in non-US equities Non-US equities present good value. Non-US shares are trading at historically wide valuation discounts to US shares ( FIGURE 2 ) . At the same time, the prospects for growth outside the US suggest that non-US earnings may grow substantially. We have already increased our weighting to Asian, European and Latin American equity markets, while reducing some of our defensive equity exposures that outperformed during 2022, like large cap pharmaceuticals. As the global recovery unfolds, we will likely look to boost non-US equities further across a range of industries, focusing on sectors and companies with the potential for sustainable revenue growth and profits. 5 S&P 400 and S&P 600 vs S&P 500 on 2023 EPS estimates. 6 Also known as the S&P 400, the index tracks 400mid-sized companies in the US equity market. 7 Tracks 600 small-sized companies in the US equity market that meet specific inclusion criteria. FIGURE 2 : US vs Non-US Relative CAPE -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 '35 '45 '55 '65 '75 '85 '95 '05 '15 World Ex-US Premium/Discount to US CAPE World Ex-US Premium/Discount to US (CAPE) Source: Factset as of April 21, 2023. UsingMSCI World ex-US andMSCI US indices. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. The CAPE ratio is a valuationmeasure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. Seeking value within US markets Within US markets, we believe there are areas of relative value worth investing in as we enter and recover from a rolling recession. An important area of note are SMID stocks, which currently trade at a 30% valuation discount to US large caps for profitable firms. 5 SMID stocks generally perform best in the first year of a recovery when their earnings are expected to rebound. The S&P MidCap 400 6 and the S&P SmallCap 600 7 are two additional categories that may provide profit opportunity. Focusing on profitable small- and medium-sized companies is advisable when the Fed reduces rates to fight unemployment, as we believe it will soon. Broadening our tech and growth equity exposures Early in the pandemic, from 2020-2021, the valuations of large tech stocks surged. Then, in 2022, we saw a reversal. Valuations of growth shares dropped as the Fed increased the Fed Funds rate at an unprecedented pace.