This year, the US stock market has returned +26%, the European market +3%, and the Asian market +4%.

Fundamentally this outcome reflects a strong US economy. The US is expected to grow 2.4% in 2024 and 1.9% in 2025. European growth is seen at 0.7% this year and 1.1% the next.

As a result, the European Central Bank is expected to decrease interest rates faster than the US Federal reserve.
www.ft.com/content/e10a0a2a-e51c-4ac5-bba9-afea037c791d

The portfolio has fallen in the past two months with the European stock market. Up 27% for the year to date, its performance now matches that of the US stock market.

A natural question to ask is if I should increase the allocation to US stocks to benefit from the strong economy there.

That might be a sensible choice if the goal was to keep copiers happy in the short term. By investing in line with the index you will not underperform.

However, I manage this portfolio as I manage my own money, with the goal of maximising returns in the long run.

As a result, the geographical allocation of the portfolio is determined by future expected returns, not past returns.

To estimate future expected returns, I follow valuation-based models, such as the one published by Research Affiliates. They predict the US stock market will return less than 4% a year over the next decade. Non-US stocks can be expected to return 9% a year.
interactive.researchaffiliates.com/asset-allocation

Models such as that of Research Affiliates are not very good at predicting 1-year returns. On a 1-year horizon, economic momentum and political events typically are more important. However, on 5-10 year horizons, valuation becomes the dominant determinant of returns.
fintegrity.com/2024/what-does-the-sp-500-valuation-tell-us-about-future-returns/

The US currently trades at an 80 percent premium vs Europe (measured by forward P/E). A premium is justified, given the high quality of US companies, but from 2000 to 2022 the premium ranged from 10 to 40 percent. ”[T]his exponential breakout [in the US vs Europe premium] from the 2000-22 range appears anomalous and unsustainable, because nothing fundamental has changed about US technological and profits growth compared with the past two decades”, argues BCA Research.

My value investing oriented methodology tries to outperform the market in a few different ways. The portfolio might outperform because 1) a cheap geography such as Europe outperforms, 2) cheap sectors and stocks within the geography outperform, or 3) oversold stocks outperform.

#1 hasn’t worked this year, but #2 did, which is why while 2024 has not been great, it’s not been bad, either.

Looking at the portfolio today, I like how cheap the companies in it are. One focus area of the portfolio is European Financials. They trade at 6-9x earnings and at a massive discount to US Financials, which I find hard to explain. Take US vs European Banks. $BAC (Bank of America Corp) trades at 13x earnings, $BNP.PA (BNP Paribas SA) at 6x. Both banks are of similar quality as measured by ROE (Return on Equity). Yes, there are political problems in France. But do they justify a greater than 50% valuation haircut?

Another focus area of the portfolio is European Real Estate, because European Real Estate Investment Trusts can be bought at substantial discounts to their Net Asset Values. Would I rather buy US commercial real estate at no discount ($BXP (Boston Properties Inc)) or European real estate at a 30% discount ($LAND.L (Land Securities))? I know which one I would prefer.

Though the past 6 months have been difficult, given attractive valuations available outside the US, I remain excited about the portfolio’s long-term prospects.

𝟮𝟬𝟮𝟰 𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲
@triangulacapital +27.4%
SWDA.L +20.4%

𝗣𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 𝗰𝗵𝗮𝗻𝗴𝗲𝘀
Barclays and Deutsche Bank were sold. Eiffage, AstraZeneca, Sanofi, Enel, Vonovia and Cellnex were bought.