Developed Markets Equity Positioning

INTRODUCTION

Over time, City National Rochdale has held a view that Developed Markets like Europe and Japan have been structurally challenged from an economic perspective and that this, in turn, would lead to secular subpar returns. Over the last five years this view has clearly been validated (see Figure 1). It is a foundation of our asset allocation process to revisit our long-term thesis to revalidate, adjust, or replace it with a new long-term outlook. We have updated and augmented our macroeconomic analysis with the latest data, supplemented by recent research from our research team, as well as the international research and academic community. This approach is represented by our proprietary 4Ps framework:

POLICIES
Monetary, regulatory, trade-related—how well these create and sustain economic growth

POPULATION
The demographic profile that is the foundational building block for economic growth

POTENTIAL
Assess the relative and absolute drivers of innovation

PROFITABILITY
The ability to convert growth into shareholder returns by assessing the divergence of GDP and corporate growth among regions

Our conclusion is that Developed Markets (DM) remain challenged. Not much has changed in terms of Policies, Potential, and Profitability, whereas the Population backdrop has worsened. While the dividend yields of other Developed Markets, especially in Europe, are attractive, our overall recommendation to clients remains intact: structurally underweight non-U.S. Developed Markets, noting that any cyclical excess returns will likely come from currency movements or due to exposures elsewhere and can therefore be captured via more intentional and direct exposure to other regions. It is our belief that the common perception that investments in non-U.S. DM equities are good diversifiers is misplaced.

We are reiterating our meaningful underweight in non-U.S. Developed equity markets and our overweight in U.S. equities. Over the last five years our clients have meaningfully benefited from this view and over the next several years our positioning will continue to drive positive relative returns. As illustrated in Figure 1 (previous page), the U.S. has strongly outperformed Europe and Japan in dollar terms.

Despite a meaningfully larger economy than other developed markets, the U.S. has delivered faster real GDP growth over the last five- and 10-year periods than other regions (see table below).

See sources at the bottom of the webpage.

Additionally, over the next 10 years the expected U.S. growth rate is expected to be higher than Western Europe and Japan as well (see chart below.)

Our long-held view that the U.S. maintains a significantly more compelling framework for generating economic and profit growth—and, ultimately, stock performance—remains intact. This is illustrated by what we like to refer to as the 4Ps:

POLICIES to support economic growth and prosperity;

A POPULATION that is younger and growing more rapidly with higher levels of productivity;

The POTENTIAL for greater innovation in industries of high intellectual property that generate above average secular growth and returns;

A superior PROFITABILITY profile of the publicly traded companies.

We believe the U.S. is meaningfully stronger in these critical factors for long-term growth, which are also highly likely to continue in the future.

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