Tom GalvinChief Investment Officer | 2019

Developed Markets Equity Positioning

It is our belief that the common perception that investments in non-U.S. DM equities are good diversifiers is misplaced.


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:

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

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

Assess the relative and absolute drivers of innovation

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 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, 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 Figure 2.)

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.


It is our belief that the common perception that investments in non-U.S. DM equities are good diversifiers is misplaced.

Sources and Disclosures

Sources for 4P Data

BCA Research


Bureau of Labor and Statistics


CIA World Factbook

Cornell University


Global Innovation Index

Goldman Sachs

Heritage Foundation


International Monetary Fund

Ned Davis Research


SC Johnson College of Business

St. Louis Federal Reserve


World Bank

Important Disclosures

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

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