Is it a smart bet to reduce European exposure? It seems certain that these markets will continue to underperform for the next one to two decades.
Based on recent political and economic events we understand the skepticism surrounding the long-term growth prospects of European markets. However, we do not feel it is a foregone conclusion that European markets will produce sub-par returns over the coming decades. In its simplest form I see three potential outcomes:
1) European markets underperform
2) They keep pace with other financial markets
3) They outperform.
Under scenario one you are correct and moving out of European markets would have been a good move. “Would have” being the operative phrase. There is certainty in the past not in the future. On the flip side there is the chance that European markets outperform in the coming decades. Under this scenario we should have increased the European exposure. Again, should have – past tense.
We are not making tactical bets based on current political and economic circumstances. Rather, we are using historical data in conjunction with decades of academic research to build well-diversified portfolio designed for the long-term.