Overseas may be the answer. International equities have picked up some momentum recently. On a year-to-date basis as of July 31, international equities performed much better than their US counterparts, with EM Index up by 25.7% and Developed Market Index up by 17.8% (see Table 1). Consequently, more and more investors are moving overseas. According to Investment Company Institute (ICI), the international equity funds had $84.7 billion inflows while domestic equity funds had $27 billion outflows in the second quarter.
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The asset flows also make economic sense. International equities do offer better valuation and growth potential. Table 2 depicts the key financial ratios across the global equity markets. Both developed and emerging market equities are much more attractive than US equities from the standpoint of valuation metrics like price-to-earnings, price-to-book and price-to-sales ratios. Furthermore, the earning growth rates are much higher for international equities.
Table 2: Global Market Key Financial Ratios
| ETF | Name | P/E | P/B | Price/Sales | YOY Earning Growth |
| SPY | SPDR S&P 500 Index ETF | 21.63 | 3.04 | 2.06 | 2.67% |
| EFA | iShares MSCI EAFE Index ETF | 18.94 | 1.73 | 1.27 | 6.89% |
| EEM | iShares MSCI EM Index ETF | 15.02 | 1.72 | 1.30 | 12.53% |
Sources: Factset. As of June 30, 2017
In our opinion, investors should increase their allocations to international equities for their lower valuation and higher growth potential. As a word of caution, currency fluctuation and geopolitical events always pose additional risks for international investing. For example, North Korea’s aggressive nuclear and missile tests presented, and will continue presenting, tremendous risks to its neighboring countries like South Korea and Japan as well as the US. Investors should expect international equities to be more volatile than US equities.
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