Published by Taylor Financial Group
Barron’s recently wrote a lengthy article discussing why it may be time to buy foreign stocks – particularly, European stocks. It’s true that, for the past eight years, U.S. stocks have been overwhelmingly outperforming their foreign counterparts, which is why we (along with others) had been overweighting U.S. stocks. But, as Barron’s pointed out, the tables seem to be turning and U.S. dominance is becoming a thing of the past. We agree with Barron’s and we want to make sure our clients are aware of these foreign investment opportunities.
The Time is Now!
Barron’s noted several benefits to buying European stocks, including attractive valuations, diminished political risk, low interest rates, and a pickup in global growth. In fact, it is anticipated that Europe’s GDP will increase by 2% this year. Having already grown 1.7% in 2016, it was better than the U.S.’s GDP for 2016, which was 1.6%. These significant increases indicate that European companies could see considerable gains in corporate earnings. European companies are already generating almost 50% of revenue outside the region.
Moreover, EAFE profits remain 45% below their previous high. And the Stoxx Europe 600 dons a price/earnings multiple of 16 times this year’s predicted earnings, which is slightly above the EAFE’s 15 times. In the meantime, the S&P 500 maintains a historically high gap, trading at 18 times earnings. Indeed, the EAFE Index, which is heavily weighted to the European region, outperformed the S&P 500 7.4% to 6% in the first quarter of 2017.
It’s a fact that the S&P 500 Index has more than tripled since the financial crisis of 2008, leaving non-U.S. markets far behind. But, according to Barron’s, look for the performance gap to narrow, or even close, in the next few years.
Are U.S. Investors Sleeping?
Because U.S. stocks have been the outperformer for so long, it seems U.S. investors are now asleep to the opportunities abroad. According to the numbers, it’s true! At the end of 2016, the allocation to international stocks for U.S. investors was 18%, a 25-year low. By comparison, the historical average is 28%.
Wake Up!
U.S. investors have good reason to consider allocating some of their portfolio to European stocks. As mentioned, there is a jump in Europe’s economic growth, which could cause European companies to experience substantial gains in corporate earnings. In addition, an especially positive change for Europe is the fact that the quality of assets (loans) for European banks has improved. Europe’s banks may have been slower than the U.S. to repair their balance sheets after the 2008 crisis, but they have exhibited that slow and steady may win the race.
We are watching European stocks closely and will consider them a topic to be discussed with clients for potential portfolio allocations.
If you have any questions about foreign stocks and how they may affect your portfolio, or if you would like to schedule an appointment, please contact us today.
Sources: Barron’s, Europe on Sale: Time to Buy Foreign Stocks, May 13, 2017
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
MSCI EAFE index is a market-capitalized index that is designed to measure the equity market performance of 21 developed markets outside of the U.S. & Canada. EAFE stands for Europe, Australasia and Far East.
STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
S&P 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.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
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