Tom GalvinManaging Director, Senior Portfolio Manager | 2018

Developed Market Equity Positioning

Using our multifactor 4Ps framework, we strongly believe the U.S. is far and away the best country in which to find economic and profit growth, which ultimately drives stock returns.

SUMMARY

In summary, using our multifactor 4Ps framework, we strongly believe the U.S. is far and away the best country in which to find economic and profit growth, which ultimately drives stock returns. After reviewing the data and ranking each country versus this cohort, we’ve added together the relative positioning to arrive at a total unweighted score (the lower the score, the better).

Our final scores:

AVOIDING THE COMMON PITFALLS

We believe investors mistakenly believe that country indices are all the same. This couldn’t be further from the truth. Equity Indices in the U.S. are dominated by high intellectual property industries such as technology and health care—industries with above average growth rates and profitability. Technology and health care comprise approximately 40% of the S&P 500. The U.S. has the best companies in these sectors, especially in technology. European and Japan indices are dominated by financial, industrial, energy and materials-related companies, which comprise approximately 40% of the indices. These industries need above-trend growth in economic activity and inflation to do better. In other words, the U.S. is more secular in its growth profile, while Europe and Japan are more cyclical.

Investors also mistakenly believe that non-U.S. DM is a good diversifier. As the chart below shows, there is a high correlation of returns over the last 15 years. Over the last 25 years, our analysis of rolling three- and five-year returns (in U.S. dollar terms) shows that the U.S. has a 65% win rate versus Germany and 81% versus Japan. So, for approximately 75% of the time, the U.S. is outperforming these other indices. In addition, the correlations are such that an investor gets more downside risk than upside participation. Lastly, since 1990 Europe has had 14 bear markets compared to six in the U.S.

CONCLUSION

We remain overweight U.S. equities and underweight other developed markets. We believe the U.S. will be able to maintain the numerous structural advantages it has versus other developed markets as it relates to Policy, Population and Productivity, Potential for Innovation and Profitability. Nevertheless, we remain vigilant and watchful for potential meaningful shifts in our 4Ps rankings and in relative economic growth opportunities.

Using our multifactor 4Ps framework, we strongly believe the U.S. is far and away the best country in which to find economic and profit growth, which ultimately drives stock returns.

Sources and Disclosures

Sources for 4P Data

BCA Research

Bloomberg

Bureau of Labor and Statistics

CEIC Data

CIA World Factbook

Cornell University

FactSet

Global Innovation Index

Goldman Sachs

Heritage Foundation

Insead

International Monetary Fund

Ned Davis Research

OECD

SC Johnson College of Business

St. Louis Federal Reserve

tradingeconomics.com

WIPO

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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