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5 Principles for Smarter Portfolio Construction - #4 Embrace Clues From Economic Fundamentals
Embrace Clues From Economic Fundamentals
Maintaining a full fundamental and economic understanding of all markets, especially those outside the U.S., can be a daunting challenge for advisors. Without a framework to provide this, advisors may opt to steer their clients toward more traditional assets, potentially losing out on market opportunities and diversification potential.
Our view: We work hard to gauge fundamental shifts in the global economy and markets before they can adversely affect our portfolios, paying close attention to a host of underlying fundamentals that impact long-term views on assets. In the context of global equities, however, four metrics stand out for us as crucial:
• Earnings growth — Specifically, real earnings growth, not nominal earnings growth, which matters a lot when you’re evaluating assets from a country like Brazil where inflation is a serious consideration.
• Dividends — We view them primarily as a proxy for cash flow and a key input in evaluating stock yields.
• Valuation — Which assets are undervalued, and which are cheap for good reason? We periodically adjust our core valuation metric (earnings yield) to reflect economic and political uncertainty. Things that concern some investors about emerging markets, for example — social unrest, economic stability, rule of law — are accounted for in this way.
• Term spreads — One key metric we focus on is the difference between two- and ten-year government interest rates in major countries; lower spreads can be an indication of uncertainty in the economy.
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