For more than a decade, investors found comfort in knowing U.S. equities were the place to be as domestic stocks easily outpaced foreign rivals, often doing so with lower volatility.
However, signs are emerging that 2023 could finally be the year that international equities, both developed and emerging, could get the better of their U.S. rivals. That could open the door to opportunity with exchange traded funds such as the IQ Candriam ESG International Equity ETF (IQSI).
IQSI could be relevant to investors this year on multiple fronts. As its name implies, the ETF combines environmental, social, and governance (ESG) virtues with international stocks. Second, the fund has outperformed the MSCI EAFE Index since inception.
“The longest stretch of US outperformance has ended after 169 months. Global equities have led the United States by >4% in 2022, marking a potential change in leadership. International stocks can provide effective diversification, but investors should be choosy,” according to Bank of America research.
There are no guarantees that history will repeat, but when international stocks have notched out-performance over U.S. benchmarks, that scenario has often featured some durability, lasting several years in some cases. Should that repeat, IQSI could be a viable option for patient investors.
“US equities have been leading global peers since November 2007, the longest stretch of regional outperformance since 1900,” added Bank of America. “The ratio looks to have peaked and the combination of slowing growth, falling inflation, and a weaker US dollar could drive a sustained period of global outperformance. There have been 14 periods of global equity leadership since 1900 that have averaged just over 3 years.”
Another point in IQSI’s favor is that the ETF offers a strong dividend profile, including some components with lengthy track records of payout growth. That’s meaningful because dividends have been a prime avenue for generating at least decent performance with international developed market equities.
“International companies that can generate cash and sustain dividend payments have outperformed historically and we think they will continue to lead traditional benchmarks,” noted Bank of America.
The research firm is forecasting ups and downs for European stocks this year, with some brighter spots potentially arriving in the second half of the year. Likewise, the bank is constructive on Japanese stocks as tactical ideas. Japan is IQSI’s largest country exposure at 23%.
“We reiterate our Favorable View on Japan equity ETFs. Masashi Akutsu expects 9-10% returns this year with a 2,150 target on the TOPIX and a 30,000 target on the Nikkei,” concluded BofA.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.