Advisors and investors have long been vexed by ex-U.S. developed markets stocks and the related exchange traded funds. Those assets have long underperformed U.S. peers.
That long run of slack performance is enough to tempt market participants. Add in the fact that many international markets trade at steep discounts relative to the U.S., and that temptation only increases. But those factors also increase frustration.
Still, some market observers are bullish on international developed market equities for 2023, indicating there could be opportunities with ETFs such as the SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX). RDMX could be seen as a contrarian idea, but there are reasons to believe developed markets equities can find some momentum next year. These reasons include RDMX’s quality purview and the shorter duration of international stocks.
“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. 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,” according to Charles Schwab research.
RDMX has other tailwinds that may be supportive of upside in 2023. Those include impressive dividend traits, lower price-to-cash-flow ratios, and recent outperformance despite the strong U.S. dollar. Plus, earnings growth in other developed markets is expected to outpace that of the U.S. in 2023.
“Earnings growth is also stronger outside the United States and is expected by analysts to remain so in 2023. The year-over-year earnings growth for S&P 500 companies in the recently reported third quarter was 4.1%, compared to 30.5% for companies in Europe’s STOXX 600 Index. Combined with lower valuations, this has helped international stocks outperform, which may become more pronounced with a pause or reversal in the sharp rise of the dollar that characterized much of 2022,” added Schwab.
RDMX, which turns a year old next month, sports a 30-day SEC yield of 3%. That’s not alarmingly high, but it’s higher than what investors find with U.S. benchmarks. Those dividends could be supportive of RDMX upside in the new year.
“More importantly, high-dividend stocks outperformed both when the market was going down during the first three quarters of the year and when it was rising during the fourth-quarter rally. There can be no guarantees, but investors may be able to navigate 2023 by sticking with what has been working in both up and down markets during 2022,” 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.