Introduction
Given the recent market correction, many analysts have discussed the possibility of a recession. This concern is leading to a reevaluation of sector weightings in portfolios. Hemispheres Investment Management (HIM) is a Global Investment Manager. The firm’s flagship product is Global Equities. HIM manages portfolios utilizing both a value and a quality approach. The combined approach has resulted in consistent and successful performance through multiple market cycles.
| Sector | S&P 500 | MSCI ACWI | MSCI Emerging Markets |
| Basic Material | 2.01% | 3.90% | 7.60% |
| Communication Services | 8.86% | 7.74% | 8.50% |
| Consumer Cyclical | 10.18% | 10.18% | 11.69% |
| Consumer Defensive | 5.78% | 6.22% | 5.16% |
| Energy | 3.70% | 4.41% | 4.72% |
| Financial Services | 12.63% | 15.63% | 20.53% |
| Health Care | 11.89% | 11.12% | 4.46% |
| Industrials | 7.90% | 10.18% | 8.71% |
| Real Estate | 2.28% | 2.16% | 2.13% |
| Technology | 32.39% | 25.82% | 23.42% |
| Utilities | 2.48% | 2.63% | 3.08% |
The sector weightings for the S&P 500, the Morgan Stanley Capital International All Country World Index (ACWI), and the MSCI Emerging Market (EM) Indices appear above. As shown, the countries outside the US have different sector weightings than the S&P 500. This is particularly evident in the Emerging Markets in basic materials, financial services, cyclicals, technology and health care. These weightings are consistent with the various countries’ largest companies and the respective economies.
Correlation between US markets and Global Markets
Countries outside the US have different political and monetary policies. Different regulations influence the types of companies listed on the index and impact shareholder returns. The economic cycles in these countries vary from that of the US. The difference in the economic cycles between the US and the alternate economies is appealing to investors. These differences become apparent when evaluating correlation coefficients.
Statistically, a correlation value less than 0.7 indicates that the S&P and MSCI-EM movements do not correlate highly. The low correlation value of emerging market highlights the opportunities to take advantage of the volatility in equity markets to purchase attractively valued securities in globally diversified investment portfolios (please refer to the correlation matrix below for statistics from 1988 to 2023). By investing in markets with low correlations, investors reduce the risk in their portfolios.
| S&P 500 | MSCI ACWI | MSCI EM | Investment Grade Bonds | |
| S&P 500 | 1.00 | 0.91 | 0.62 | 0.05 |
| MSCI ACWI | 0.91 | 1.00 | 0.77 | 0.06 |
| MSCI EM | 0.62 | 0.77 | 1.00 | 0.03 |
| Investment Grade Bonds | 0.05 | 0.06 | 0.03 | 1.00 |
Global Equities vs. International Equities
A global equities portfolio includes securities from both the United States and international stock markets. A Global Equities portfolio differs from an international equities portfolio that only holds stocks outside of the United States.
The MSCI-ACWI includes 45 stock markets (23 Developed Markets and 24 Emerging Market countries). The MSCI-ACWI tracks 85% of the world’s listed companies. The aggregated value of MSCI-ACWI is almost $68 trillion, as of the end of January 2024. The largest country weightings of the ACWI Index are:
| Country Weighting | Value in US $ Trillion | |
| United States | 63.2% | $42.7 |
| Japan | 5.6% | $3.8 |
| United Kingdom | 3.5% | $2.4 |
| France | 2.9% | $1.9 |
| Canada | 2.8% | $1.9 |
| Other Countries | 22.0% | $14.9 |
Value Investing
Hemispheres Investment Management (HIM) is an All-Cap Global Value Manager. Our investment process begins with bottom-up analysis to identify undervalued opportunities at the individual company level. HIM uses metrics such as price-to-earnings, price-to-book value, dividend yield, and price-to-economic value to value stocks. Combined with fundamental analysis we determine fair market value.
An undervalued stock could be due to a temporary setback at a company, or it could be sector and market/economic cycle related. To the extent the low valuation is a result of a sector downturn, we would likely find other stocks in the sector that would meet our criteria. The result could be an overweighting of the sector. In any case, selecting value stocks is a proven strategy. Rotating into these undervalued stocks and sectors can result in significant profit potential as industry and individual security valuations normalize[1].
A January 2023 analysis performed by Blackrock using the Ken French data library and analyzing data from July 1963 through January 2023 reflected interesting findings. The study showed that value investing outperformed other factors such as large size, higher priced companies, less profitable firms, downward trending stocks and higher risk securities by 67% on a rolling 3-year basis and by 73% on a rolling 5-year basis.[2]
Investing in Quality Companies
HIM is a value manager that focuses on company financial fundamentals. The firm invests in industry leading companies with solid fundamentals such as profitability, positive cash flow generation, and the quality of the firm’s balance sheet. Our analytical process includes evaluation of competitive position and management strategy to name a few factors. In the Blackrock analysis mentioned above, when compared to the same factors (large size, higher priced companies, less profitable firms, downward trending stocks, higher risk securities) the quality factor resulted in outperformance of by 78% on a rolling 3-year basis and by 83% on a rolling 5-year basis.[3]
Conclusion
HIM is a global equities manager that focuses on identifying stocks that are both undervalued AND high quality. The more undervalued the company, the higher the potential upside for investors when it reaches its fair market value. Furthermore, selecting undervalued and high-quality securities helps minimize client risk.
With over 45 markets to choose from and over 10,000 companies with a market capitalization in excess of $1 billion, a plethora of securities provides global investors with substantial opportunities in domestic and international stock markets. This compares to 2,000+ in the US market alone.
Hemispheres Investment Management’s team of seasoned professionals have a 35-year track-record of successful investment strategies, including deep proficiency investing in US, international developed and emerging markets.
Please contact Hemispheres Investment Management for a free consultation. We provide guidance and strategies to assist you optimize your investment policy and help you achieve your investment goals. Book a meeting.
[1] Sector Rotation Strategies (hemispheresim.com)
[2] https://www.firstlinks.com.au/factor-investing-can-help-drive-better-returns
[3] https://www.firstlinks.com.au/factor-investing-can-help-drive-better-returns
