Foreign markets have underperformed U.S. equities over the past decade, but it might be time for investors to consider international stocks and related exchange traded fund exposure.
Over the past decade, the iShares MSCI ACWI ex U.S. ETF (NasdaqGM: ACWX), which tracks the MSCI ACWI ex USA Index, generated an average annualized return of 4.3% and iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, returned an average 2.6%, while the S&P 500 Index returned an average 13.8%.
The outperformance in U.S. markets has pushed up domestic valuations far above foreign valuations, and now, some are wondering if these cheaper valuations in foreign markets may be attractive enough this time around.
“If you’re investing for the next 10 years, valuations are compelling to invest overseas,” Steven Violin, a portfolio manager at F.L.Putnam Investment Management Co., told the Wall Street Journal.
After the recent run-up, the S&P 500 is hovering around new record highs and trades at a 24.2 price-to-earnings and a 3.0 price-to-book, according to Morningstar data. Meanwhile, ACWX trades at a 17.6 P/E and a 1.4 P/B while EEM shows a 15.9 P/E and 1.5 P/B.
Looking at their economic outlook, many foreign countries have had a better handle on the coronavirus outbreak when compared to the U.S., which recently topped 5 million Covid-19 confirmed cases. This has helped put some of these foreign economies in a much stronger position than the U.S.
“We’re seeing signs of a potential second wave in countries like Spain and France,” Amanda Agati, chief investment strategist for PNC Financial Services Group, told the WSJ. “But they’ve already proven they can deal with a temporary shutdown, whereas the U.S. is still struggling with that initial wave.”
The improved economic conditions have also translated to better earnings expectations for these international markets. According to FactSet data, earnings for companies in the MSCI Emerging Markets Index will fall less than earnings for companies in the S&P 500 index for 2020. Emerging-markets earnings are even expected to rebound more than U.S. earnings in 2021. Overseas developed-market earnings are anticipated to bounce back further than U.S. profits next year as well.
“With a long-term view of where the world’s growth is likely to emanate from, emerging markets is where you might like to place your bets,” Karim Ahamed, a financial adviser at Cerity Partners, told Reuters. “They have young and vibrant economies, growing faster than developed markets.”
For more information on the global markets, visit our global ETFs category.