Conscious Capital Perspectives | August Portfolio Update
On Monday, August 16, 2021 we completed the cycle with our tactical adjustments across our ETF series portfolios, recommitting the proceeds we took from Emerging Markets at the end of July to purchase Europe and bring it to something approximating a benchmark weight.
As we discussed in our Summer newsletter, the consensus earnings-per-share growth in Europe is expected to expand over 40% in 2021 after contracting over 25% in 2020 based on MSCI indices. European shares have been performing well so far this year with the MSCI Europe index up 18% through the end of July, on par with the S&P 500. Valuations in Europe compare favorably, with the 12-month forward PE ratio currently standing at 15.7x versus the rather full 20.3x for the S&P 500. The performance of Europe in the global equity rally so far this year is an encouraging sign that further gains may become a reality as market participation expands.
Adding to the case for Europe, European stocks have underperformed US stocks for over five years now. The Eurostoxx 600 has climbed 69% over the five year period ending July 31st which is a respectable advance, but trails the S&P 500 by more than 53%. Over the past several months, European shares have been keeping pace with their US counterparts, which may suggest that there is a rotational opportunity on the Continent taking into account the valuation advantage. The combination of challenges in the Emerging Markets and favorable comparisons with our home market (US) drove the decision to raise our exposure in Europe to neutral relative to our benchmarks as opposed to allocating to other segments of the global asset map.
As a reminder, our ESG portfolios are principally stocked with active management and as such our exposure to Asia Pacific is driven by fundamentals including a strong bias to good governance and transparency, economic justice, equal access and opportunity, good environmental practices, and other sustainability factors which skew the portfolio away from China except for select opportunities. The result is regional exposure with a significant quality and more developed market bias, meaning that it is not expressly an EM strategy. These same biases have also driven the managers to favor developed Europe when investing outside the US. Therefore, we did not feel the same impulse to adjust our global allocation in our ESG series portfolios because many of our concerns and expectations we believe are inherently addressed in the bottom up strategy already.
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