S&P Dow Jones Indices: Assessing US Equity Markets in light of Brexit and pound volatility
S&P Dow Jones Indices: Assessing US Equity Markets in light of Brexit and pound volatility
S&P Dow Jones Indices has published a new blog post related to Managing Brexit Risk, by Jodie Gunzberg, Managing Director, Head of U.S. Equities, with insights on how investors in the UK and Europe may possibly position themselves in the U.S. equity market.
S&P Dow Jones Indices has published a new blog post related to Managing Brexit Risk, by Jodie Gunzberg, Managing Director, Head of U.S. Equities, with insights on how investors in the UK and Europe may possibly position themselves in the U.S. equity market.
Key Data and Takeaways
Volatility in UK, although not as much as in the U.S., has increased with the S&P United Kingdom BMI (US Dollar) 30-day annualized volatility reaching 16.1% on Nov. 15, nearly doubling its level of 8.7% on Sep. 27. With the increase in volatility, especially in large caps in the S&P 500, investors may question the power of the U.S. equities to diversify a UK or European equity allocation. However, the longer term returns from the U.S. are significantly higher over several periods, which makes the case for excluding them difficult to prove.
While most international investors use the large caps for their U.S. equity exposure, perhaps one may consider the historical benefits of mid-cap or small-cap that have been more powerful, especially now that the volatility of large caps has risen to the level seen in the S&P MidCap 400 and S&P SmallCap 600. If the long-term historical outperformance of the small-cap and mid-cap hold, then one may earn almost a 3% annualized premium over the long term – as long as there is quality like in the S&P 500, S&P MidCap 400 and S&P SmallCap 600.
The mid-caps and small-caps also have lower historical correlation with international equities. For example the correlation of the UK to U.S. large-caps is 0.81, but is just 0.67 to small-caps. This is likely not just from size but from the percentage of revenues generated domestically that differ from larger to smaller companies. The S&P SmallCap 600 generated nearly 80% of revenues from the U.S., while the S&P 500 generates just over 70%.
Gunzberg, Managing Director, Head of U.S. Equities comments: “Not only is there more potential diversification in the traditional sense from lower correlation of smaller companies to international equities, but there is more downside protection historically from mid-caps and small-caps than from large-caps. For every 1% drop historically in the UK, the S&P 500 fell on average 58 basis points, while the S&P MidCap 400 fell on average 51 basis points and the S&P SmallCap 600 fell on average just 44 basis points.”