Where Do International Markets Fit in Today's Portfolios?
Source: FA-IQ, Jan. 3, 2018
BRUCE LOVE, MANAGING EDITOR, FINANCIAL ADVISOR IQ: Hi, this is Bruce Love with Financial Advisor IQ, and I'm here with Brent Schutte, who's the CIO of Northwestern Mutual Wealth Management. So Brent, you've been looking at 2018 with a fine eye. You've been trying to forecast what's going to happen investment-wise. What's your thoughts for wealth managers for this year? Whether it's growth or income or presumably growth. I mean, would you be looking at emerging markets? Would you be looking at just global equities as a whole? Would you be looking at specific regions?
BRENT SCHUTTE, CHIEF INVESTMENT STRATEGIST, NORTHWESTERN MUTUAL WEALTH MANAGEMENT: So we do maintain diversification. We obviously have a heavier weighting in the U.S. markets as our longer-term base case. Solely because my clients or our clients, their debts are denominated in dollars. And so I want their assets denominated in dollars too. And it's OK to have U.S. home country bias because most everything that you consume you can consume in this country, right?
But we do keep money in the international markets. And those are the markets that we have tilted our portfolios towards over the past couple of years because one there earlier in their economic cycle. I think we all forget that the eurozone economy was in pretty much a recession until 14, 2014. They're a little bit behind us. And they're early in their earning cycle.
And if I can go back historically and look at what the economy's early in the cycle and we can actually measure this, the country that is earlier in the cycle typically has the higher returns and wins on a relative basis. And so we do like the international markets more emerging and international developed more so than the U.S. But that doesn't mean that we are ignoring the U.S. Within the U.S we have a bias towards large over small and mid.
BRUCE LOVE: OK.
BRENT SCHUTTE: And so even though there's tax reform, which will probably benefit the small and mid-cap companies more, we're later in the economic cycle. And typically towards the end of an economic cycle, the larger cap companies do tend to do better.
BRUCE LOVE: So let's think about the cycle and think about the 12 months ahead. You're saying in all likelihood it's going to be a nice good year for growth in equities, but there could be some corrections. What are the leading indicators going to be for you this year that the correction might be sooner rather than later?
BRENT SCHUTTE: I think 2018 would be more of an inflation story. I think it's coming back.
But I don't think the Fed is in any rush to stomp anything out. And that's why I think I have a couple of years left. Because I don't believe that Jerome Powell, who is the new Fed Chair, wants his first act to be to cause a recession or a market downturn. And right now there's little appetite for that. I do believe the Fed's are going to err on the side of caution.
And so I do think you have time left in the cycle. I just worry that when the inflation actually shows up, the market isn't priced for that. I think people believe inflation is a relic of the past. I hear new excuses every day about why inflation is never coming back.
I don't doubt that longer-term inflation could be lower, but that doesn't mean you can't have bouts of inflation in between. And I think the bond market is priced without regard for any level of inflation. And so the format that I would see would be some sort of inflation actually showing up to get above the 2% target. Perhaps some around mid-year, that causes the bond market to have a little bit of a shock, which filters through the equity markets because those two markets are connected, right?
The reason why stocks trade at expensive levels is because bond yields are low.
BRUCE LOVE: A lot of advisors will be probably having their early year meetings with their clients coming up in the next few weeks. What are the three things that they should be getting across?
BRENT SCHUTTE: I think diversification and longer-term goals are always important. If you're an advisor who does a financial plan, I think tying it into that is incredibly important because let's be honest, most of our goal is to keep our clients in the game and to keep them invested for the longer term goals and objectives, right? And so I think every single time that's the most important thing you can do. And that I would focus--
BRUCE LOVE: You only need one then.
BRENT SCHUTTE: Yeah, I mean I go back to this. And I give an example of this earlier on. I travel around the country, and we have a lot of advisors and a lot of their clients, and I sat in on a meeting where the advisor had the client come in, and I was there to tell him how well their portfolio did or didn't do. That's what my job has been in the 23 years that I've done this, is just how did you do versus the benchmark.
And in this meeting luckily I was able to tell them that we've had some success recently and we've done fairly well. But that's not what that clients going to remember because during that meeting that client came in-- the spouse was concerned the husband was working too hard and that potentially it was hurting his health. And her question was could he retire or could they retire. And the advisor was able to answer yes. Now, which one do you think had more of an impact? My 50 to 100 basis points about the benchmark or the fact that I could retire?
BRUCE LOVE: Absolutely. Brent that's been fantastic. Thanks so much.
BRENT SCHUTTE: Thank you, Bruce.