Investors in the U.S. are by now undoubtedly familiar with the Federal Reserve’s rate tightening campaign, which has consisted of six interest rate increases this year.
Similar monetary tightening is being pursued around the world. In fact, plenty of other central banks started hiking rates before the Fed. As such, the Fed’s counterparts in an array of other markets can likely dial back on rate hikes or even consider monetary easing before the U.S. central bank.
Either policy could be beneficial in 2023 to international equity exchange traded funds, including the IQ Candriam ESG International Equity ETF (IQSI). In fact, a case can be made that the stars may already be aligning for IQSI to potentially deliver upside in 2023. A primary reason for that is the point that much of IQSI’s lineup fits the bill as quality.
“Another way we have been defining quality stocks is focusing on stocks with more immediate cash flows, rather than cash flows in the distant future: short duration stocks. These stocks have outperformed since rates bottomed in 2020,” according to Charles Schwab research. “They also outperformed in 2022 when the market was falling and in the fourth quarter when it rebounded. The easiest way to find them? Use the price-to-free-cash-flow ratio to sort stocks: the lower the price to free cash flow, the higher the quality.”
Another point in IQSI’s favor is that international stocks, broadly speaking, are shorter in equity duration than their U.S. counterparts. That might be one reason that, quiet as it has been kept, some major developed market equity benchmarks recently started beating equivalent U.S. gauges.
“Since signs of a stepping-down began to emerge at the start of October, the MSCI EAFE Index of international stocks climbed 20% and is now slightly outperforming the S&P 500 on a year-to-date basis, despite this year’s big gain in the U.S. dollar,” added Schwab.
Speaking of the strong dollar, the greenback’s run could slow next year if the Fed reduces the pace of its rate hikes. In turn, that could boost international stocks.
Another factor that could work in favor of IQSI next year is that many of its components are dividend payers. That group has been among the best performers outside the U.S. this year, and payouts are growing in plenty of ex-U.S. markets.
“The outperformance by international stocks may continue in 2023. International stocks tend to possess more of the characteristics, like high dividend yields and lower price-to-cash-flow ratios, that have contributed to outperformance within and across sectors and countries this year,” concluded Schwab.
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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.