Obviously, the arrival of the coronavirus pandemic brought about a bear market for stocks. Fortunately, it was brief by historical standards.
Of course, bear markets are challenging, and the pandemic is still lingering, but there may be some silver lining for investors to consider. Some of that positivity comes by way of international equities, long overlooked by many investors and now attractively valued relative to U.S. stocks.
Valuation alone isn’t a reason to buy or sell an asset class. However, as Nationwide’s Mark Hackett points out, there are multiple points in favor of embracing international stocks.
“Four major drivers inform this argument. First, a macroeconomic tailwind from fiscal and monetary stimulus suggests an edge for international equities over U.S. stocks as the global economic cycle progresses,” says Hackett. “Second, a structural divide in how countries have rolled out COVID-19 vaccines and reopened their economies. Third, global markets have different industry exposures to American ones. And finally, international markets – specifically developing countries – are showing signs of superior prospects for earnings growth.”
These days, many investors may be over-allocated to domestic stocks simply because the S&P 500 consistently topped the MSCI EAFE and MSCI Emerging Markets indexes since the global financial crisis. That’s accurate, but investors should remember that past performance isn’t guaranteed to repeat.
“But the past is not always good prologue of the future. There are justifications for a position that U.S. stocks are no longer good value relative to the rest of the world,” notes Hackett. “We can see this in the proxy measure of the price-to-book ratio. Here, the stellar U.S. performance of late may be helping to produce relatively high valuations. The price-to-book ratio for the S&P 500 tripled from 1.4x to 4.2x since 2009, leaving the MSCI EAFE and Emerging Markets in its wake.”
Another relevant near-term consideration for investors considering international stocks is that while the U.S. is relatively far along in its post-COVID economic recovery, the same isn’t true across an array of international markets.
“Despite this early success, it does hand other countries a relative advantage in the next spell of the recovery. Reopening has a ceiling, as no economy can be more open than fully open,” adds Hackett. “This suggests that the bulk of the low-hanging fruit lies outside of the U.S. In other words, the U.S. has reaped the early gains by reopening a heavily shuttered economy, but future gains are more likely to be found in places outside of the U.S.”
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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.