Market Memo Update: 3 more reasons to 'think international'

06-12-2018

In January, I outlined three reasons why we think international stocks are a good place to be: accelerating growth in much of the world, improving earnings and continued central bank stimulus. All three of those factors remain pretty much in place, albeit a few hiccups have occurred in Europe that we think largely are politically related and ultimately will prove temporary. In the meantime, we think there are three more reasons to think international.

  • Reason No. 1: Mean reversion. As the chart below shows, since the culmination of the global financial crisis in 2009, the S&P 500 has strongly outperformed world markets as measured by the MSCI EAFE index. We began to see that reverse a bit in mid-2016 through 2017 as growth in Europe outpaced that in the U.S., before this year’s midwinter global sell-off on fears of rising inflation muddied the waters a bit. But history and fundamentals suggest the trend toward global outperformance relative to the U.S. should resume, aided by more accommodative central banks relative to the Fed, falling unemployment and lower developed-country consumer debt levels relative to U.S. consumers.

For illustrative purposes only and not representative of performance for any specific investment.  Past performance is no guarantee of future results.
  • Reason No. 2: It’s a wide, wide world. The choice for diversified long-term investors comes to this: there is the U.S., which represents just 4% of the global population and 25% of global GDP, and the rest of the world. International exposure allows for participation in this remaining 96% of global population and 75% of global GDP. True, some exposure is possible through S&P 500 companies that generate a significant amount of their profits and revenues from overseas sales and subsidiaries. But geopolitics, currency fluctuations and other inter-country differences and disputes argue that at least a portion of a truly diversified portfolio should include names based outside the U.S.
  • Reason No. 3: Sector and security selection. Our team’s benchmark-agnostic approach to investing allows us to home in on growth and specific company opportunities wherever they arise. Currently, we’re finding a wide selection thanks to disruptions caused by geopolitical events. The tariff-trade war kerfuffle, for example, is pressuring non-U.S. auto and auto parts companies, creating from our perspective some compelling values given these companies’ solid fundamentals and stature in the global auto market. Similarly, some fundamentally sound European banks have suffered sell-offs in the wake of the Italexit scare, again providing opportunities for the longer-term investor.

To be sure, there are risks. The White House’s imposition of steel and aluminum tariffs and the Trump administration’s threat to impose 25% tariffs on imported German vehicles may simply represent hardline negotiating tactics. But until the dust settles, the uncertainty is creating issues for European and Canadian industries and companies. The new populist government in Italy has rattled nerves and markets. But from our perspective, this is no Brexit—Italy has a history of government turnover and drama but, at the end of the day, is highly unlikely to abandon a European union that has dramatically raised and improved its global profile. And rising global interest rates at some point may pinch growth—they always do. But we’re nowhere near that point yet. Where we are is at a point at which worries over the aforementioned risks are generating attractive entry points for adding to global portfolios. So enjoy the summer and don’t forget to “think international.”