The days of the binary trade — risk on or risk off — left few choices for investors.
Either they piled into stocks (risk on) or bonds/cash (risk off). There were few distinctions among industries or even countries, as equities tended to move in tandem, helped by central banks’ easy-money policies from the U.S. to Europe to Japan.
But that’s starting to change. There are now divergences among so-called risk assets, creating opportunities for investors who perform their own due diligence to create alpha, or gains that outperform benchmarks.
As U.S. stocks hover near record highs in overbought conditions, we can look for other risk assets that might be, temporarily, underperforming. Investors are finally starting to get squeamish on the U.S. stock-market rally as the S&P 500 Index is posting its best annual advance since 2003.
Enter emerging markets. Global investors have been placing bets on the U.S., but now the question is: Which lagging countries could take the lead? Bloomberg put together the table below that shows, in red, which global economies are heating up based on leading and coincident indicators.
As you can see, you might want to sidestep countries including Thailand (up 5 percent this year) and India (up 6 percent), and consider stocks in Korea (up 0.1 percent), the Philippines (up 11 percent) and Singapore (up 3.3 percent).
There are risks, however, that need to be assessed, but the lesson is there: Carefully picking investments can help you avoid long-shot bets and, thus, tilt the odds in your favor for outsized gains.
Best wishes,
The Money and Markets Team
