One of the most common views that has emerged on Wall Street in recent weeks and months is that now is the time to buy stocks outside of the US.
For fairly conclusive evidence supporting that view, look no further than the chart below, from a January note from Bank of America. Despite 2022’s sell-off, US stocks are still more expensive relative to stocks in the rest of the world than they have been since 1950. And by a long shot.
Bank of America
That can be chalked up to a few things. As the above chart reflects, the dollar strengthened immensely in 2022 relative to other currencies due to the Federal Reserve’s tightening regime. Further, valuations of US stocks have soared since early 2020 thanks to the large amounts of cash stimulus that got pumped into the market. That stimulus also helped fuel a strong economic recovery that outpaced those seen in other parts of the world. The resulting earnings rebound also helped lift stock performance.
But a reversal in fortunes for US stocks relative to their international peers seems to be in motion.
“Our global equity forecasts point to better return potential in non-US markets, and recent flows have aligned with those views,” said David Kostin, the chief US equity strategist at Goldman Sachs, in a note to clients on Monday.
It’s big shift from past years — according to BlackRock, US stocks have beaten ex-US stocks in eight years out of the last 10. But when US stocks deliver low annualized returns over a 10-year period, international stocks almost always deliver better performance. Given that strategists at banks like Morgan Stanley, Bank of America, and Goldman Sachs see the S&P 500 returning around 4% or less this year — and given that valuation measures like price-to-sales remain near levels seen during the dot-com bubble — that could very well be what happens in 2023 and beyond.
BlackRock
With the bleak outlook for US stocks, we’ve compiled where outside the US top money managers and strategists are recommending investors put their money for the years ahead.
7 places around the world to invest in
One of the most consequential developments in recent months in terms of global growth has been the easing of Chinese policy around COVID-19. Since China has stopped its zero COVID policy, its massive economy is starting to reopen, which should further ease global supply chains.
This is fueling bullishness on China and countries that will benefit from its economic reopening.
“We prefer emerging markets including China, as well as German equities, which we expect to be among the main early beneficiaries of China’s reopening and an inflection point in global growth in 2023,” said Mark Haefele, the chief investment officer at UBS Global Wealth Management, in a client note this week.
But other areas of the global equity market look attractive right now as well, according to Ben Inker, the co-head of asset allocation at GMO, which was founded by Jeremy Grantham.
In a January 31 note to clients, Inker shared five investing factors are cheap again after a rocky 2022. Four of those factors were international. They included: global value vs. growth; emerging value equities; Japanese small value; and European small value. Among those, Inker and GMO are plugging the most money into global value and emerging market value stocks.
The below chart shows GMO’s projected seven-year returns for various pockets of the global stock market based on their current valuations. International small caps and emerging-market equities are both expected to return above 5% per year.
GMO
Inker said he recommends buying into the areas of the market listed above given their limited downside and explosive potential upside soon after the market bottoms. He compared the current environment to the dot-com bubble bursting, and the market’s subsequent recovery.
“When markets did decisively turn in 2003 and the S&P 500 gained a gratifying 28.7%, Emerging rose a stunning 55.8%. Perfect timing would have seen investors hold their fire in emerging markets in 2001-02 to hit the very bottom. But being two years early made investors far more money than being one year late,” he said.
Inker has company in Rob Arnott, investing legend and the founder of Research Affiliates. In December, he told Insider that the two trades he’s bullish on for the next decade include developed-market equities outside of the US and emerging-market value stocks. He said he thinks both trades will return 15% per year, on average, while US stocks will return 6-7% per year.
“I’ve been called a perma-bear, but I’m not a bear when things are cheap,” Arnott said. “Emerging-markets value, international value represent bargains. Not screaming bargains, but bargains.”
The below chart from an Arnott commentary in January shows where international developed-market stocks and emerging-market value stocks were valued as of September 2022 relative to other factors. The further left on the chart the dots are, the cheaper they are valued.
Research Affiliates
While investing overseas may sound impractical at first for US-based investors, ETFs traded on US exchanges offer exposure to various parts of the global market.
Some funds that cover the above factors include: the SPDR S&P China ETF (GXC); the Global X DAX Germany ETF (DAX); the Cambria Global Value ETF (GVAL); the Avantis Emerging Markets Value ETF (AVES); the Dimensional Emerging Markets Value ETF (DFEV); the iShares MSCI EAFE Value ETF (EFV); iShares MSCI Japan Small-Cap ETF (SCJ); and the iShares MSCI Europe Small-Cap ETF (IEUS).
