Published by Taylor Financial Group
With international markets posting such strong returns lately, there has been a lot of discussion surrounding the potential of international investments. As the domestic stock market continues to climb and push to record-highs, investors are having a harder time finding value within the United States and are beginning to look elsewhere for opportunities. Since the beginning of the year, we believe that there has been a strong argument to be made for why it may be a good time to increase investments in both emerging markets as well as developing markets (see May 23rd blog, “Wake-up! It May Be Time to Buy Foreign Stocks!”). To better understand the potential opportunities connected with international markets, we’ll review the two most popular arguments for investing in international markets now: cyclicality and recent economic data.
Historic performance data has shown that the U.S. market and international markets both have cycles of under and over performance. Since 2007, the S&P 500 has outperformed the MSCI EAFE, the international equities Index, by 84.2%. Previously, between the time period of 2000 and 2007, the MSCI EAFE outperformed the S&P500 by 60.5%. This cyclical trend continues on if you take a look further into history, which is why many people believe that international markets should be due for a period of strong performance. This notion has gained much more momentum as the U.S. markets continue to climb and analysts begin to worry about the U.S. entering “fully-valued” or even “over-valued” territory.
While being able to recognize cyclical patterns is useful, it is not a perfect science by any means. It is hard to tell when one cycle starts and ends, as well as how long it may continue. Another indicator that can help paint a better picture is economic data. The reason that we, as well as many other investors, believe it may be a good time to increase international exposure is because of the strong data that has come out in favor of international markets. The international market’s price to earnings ratio is at a 5-year low relative to U.S. market. Although the P/E ratio is not a perfect indicator of future performance, looking at the broad market does indicate that international companies may be undervalued.
Along with international markets being seemingly undervalued, there has also been strong growth in GDP. The European Union, known as the EU, posted GDP growth of 1.7% in 2016, which meant that the EU GDP grew faster than the US for the first time since the 2008 stock market crash. The EU is also getting closer to its target inflation rate of 2%. Throughout the second half of 2016, inflation numbers continued to rise, which is a promising trend as it shows healthy growth. Even though there has been a small decrease in inflation during the beginning of 2017 overall, the inflation rate is still much stronger than it has been for the past 3 years. Inflation in Europe in small amounts is good for the economy and helps eliminate fears of deflation.
It is absolutely impossible to predict what exactly will happen in the markets going forward, which is why we are big proponents of a balanced, diversified approach to investing. However, with U.S. markets being so highly valued and strong international economic data, we do see a good argument for why it may be time to increase international exposure. Doing so will not only help further diversify your portfolio, but could potentially add some value going forward.
If you have any questions or want to discuss international investment options for your portfolio, please give us a call.
Thornburg, International Investing: Get Ahead of the Curve, June 2017
CNBC, Euro Zone Growth Outpaces the US for the First Time Since the 2008 Crash, Jan. 31, 2017
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The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Barra, a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
Additional risks are associated with international investing, such as currently fluctuations, political and economic stability and differences in accounting standards. Opinions expressed are not intended as specific investment advice nor to predict future performance. All economic and performance information is historical and not indicative of future results. Past performance does not guarantee future results. You cannot invest directly in an index.