Wealth Management

Investors Haven’t Missed the Boat on International Stocks

By Kathleen M. Fisher October 18, 2017
Investors Haven’t Missed the Boat on International Stocks

Stock index returns this year show that non-US investing has become a popular destination, but what about those not yet on board? Don’t worry, that ship hasn’t sailed. Now is the ideal time to broaden your horizons.

The US stock market has been the best place to invest since 2009—but that all changed in 2017. For the year through September 30, the 20% returns of the MSCI EAFE, the developed international stock market index, and 27% returns of the MSCI Emerging Markets stock index have far outpaced the 14% returns of the S&P 500. It’s no wonder some investors question whether the international opportunity has already passed. We don’t think so. In fact, now is an opportune time to ensure adequate exposure.

THE LONG VIEW

There’s a broad case to be made for international stocks that starts with expanding the opportunity set. Today, non-US companies account for nearly half of the world’s stock market, making them too important to overlook. Plus, non-US markets tend to be less efficient, offering greater opportunity for stock selection.

International equities also provide valuable diversification benefits. No single market wins all the time, and it’s hard to predict which will outperform in any given period. This variability creates a strong argument for making international stocks a part of a diversified, long-term strategy.

WHAT ABOUT NOW?

While the long-term case for international investing remains compelling, the near-term case does too, despite the strong performance of non-US stocks this year. Earnings growth has been quite robust in the US of late, but it’s been even stronger in non-US markets. That’s a trend we expect to continue, thanks to an improving economic backdrop, expanding export growth, and more stable commodity prices.

Plus, after years of underperformance, valuations are significantly lower for non-US stocks than for US stocks (Display). We see potential for non-US stock valuations to rise as investors become increasingly comfortable with the outlook for earnings growth. Increased political stability and broad-based reforms will play a key role, too.

Take political uncertainty. While US corporate managers are dealing with more political disunity than they have in years, dwindling political uncertainty should support stock valuations in many regions overseas. For instance, markets welcomed centrist newcomer Emmanuel Macron in France. In Germany, Chancellor Angela Merkel is working to develop an effective centrist coalition government. And, while Brexit still looms on the horizon, it’s a fairly well-known risk. In general, Asia also appears to be enjoying a period of relative political tranquility. Reform measures—like those seen in China, India, Japan, and France—represent another encouraging development. Taken together, all these trends provide supportive conditions for international valuations.

THAT’S THE TICKET

Allocation decisions between US and international equities should hinge on a longer-term rationale, and we believe the case for international investing remains compelling. Yet, so too does the near-term case. Now, more than ever, optimal exposure to non-US stocks is a key part of a well-diversified long-term allocation—and a passport to opportunity.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI.

Investors Haven’t Missed the Boat on International Stocks
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