Despite the rebound in global equities this year, international stocks and related ETFs still look attractive relative to the high-flying U.S. markets.
“Relatively attractive valuations, ongoing easy monetary conditions and weaker currencies versus the greenback should support stocks in the eurozone and Japan,” BlackRock strategists, led by Richard Turnill, said in a research note.
In an extended bull run, U.S. markets have rallied to record highs but they are now trading at lofty valuations relative to historical averages. On the other hand, international markets that have mostly lagged behind the outperformance in U.S. equities remain attractively priced.
Furthermore, the strengthening global economy helps support many export-oriented industries, such as those in the Eurozone and Japan, and their depressed currencies also provide another competitive advantage.
Investors can gain exposure to Japan and the Eurozone through related ETFs, such as the iShares MSCI Japan ETF (NYSEArca: EWJ), iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ).
However, investors should also be wary of potential currency risks when gaining overseas exposure.
“We expect greater yield rises in the U.S. than in the eurozone and see the U.S. dollar strengthening gradually against the euro,” according to BlackRock.
Investors who believe the euro currency could weaken after its recent rally and are bullish on the broader Eurozone can turn to the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). These currency-hedged Europe ETFs may outperform non-hedged Europe funds if the euro depreciates against the U.S. dollar.
Additionally, investors may also find opportunity in the rebounding emerging markets.
“We also like emerging market (EM) equities on economic reform momentum, improving cash flows and reasonable valuations,” according to the BlackRock strategists. “We do not see a modestly stronger U.S. dollar undermining the investment case for EM, but acknowledge the risk of a China growth slowdown if Beijing were to step up its reform agenda.”
For broad emerging market exposure, investors can look to options like the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO).
For more information on international markets, visit our global ETFs category.