Investors eye foreign markets and like what they see.
For more than a decade, international stocks have lost performance race after performance race to the U.S. equity market. Investors have shunned foreign stocks in the past few years due to the Russia-Ukraine war, China’s zero-Covid policy, and other concerns.
But lately, investors in overseas shares have stepped on the gas.
As seen in the chart, the MSCI All Country World ex-US index (which tracks developed and emerging-market foreign stocks) has beaten the S&P 500 by 17% over the past 12 weeks—the biggest such outperformance for the international index going back to 1999
International Stock Performance Vs. U.S. Stock Performance
Source: Bloomberg, as of 1/24/23.(rolling 12-week spread)
Some key drivers of this recent international surge include:
- A weaker U.S. dollar. The dollar surged relative to other currencies last year, which translated to lower returns for U.S. investors in foreign stocks. Recently, however, the dollar has pulled back—closing at its lowest level (versus a basket of foreign currencies) since June 2022. The weaker dollar has relieved some of the downward pressure on overseas equities.
- China’s economic re-opening. China has lifted its strict Covid-19 quarantine requirements, allowing Chinese companies and consumers to re-engage with the global economy. This effective re-opening of the world’s second-largest economy may give a boost to foreign stocks going forward.
- Better-than-expected weather. The Russia-Ukraine war sparked fears of an energy crisis in Europe, which relies largely on Russian-controlled oil and gas. But a warmer-than-anticipated European winter thus far has eased those worries somewhat.
- Attractive valuations abroad. Even with their recent run-up, international stocks as a group remain relatively cheap—with the companies in the STOXX Europe 600 index trading at around 13 times projected earnings over the next 12 months, versus nearly 18 for the S&P 500, according to FactSet. That index of European stocks has traded at a greater discount to the S&P 500, only 6% of trading days since 2010. In the current high interest rate/tight monetary policy environment, valuations can be especially important.
Horizon has increased its international positioning recently and may continue to do so. Specifically, we are focusing more on Asia and emerging markets due to the potential growth impulse from China reopening and these markets’ relatively strong risk/reward characteristics. That said, risks for international stocks abound—including the potential impact of the Russia-Ukraine war, a bumpy road for China as it loosens its Covid restrictions, and the possibility that the Fed will keep interest rates elevated for longer than expected and contribute to a global economic slowdown. As always, we will monitor conditions closely to attempt to mitigate risks and pursue opportunities.
This commentary is written by Horizon Investments’ asset management team.
Past performance is not indicative of future results.
The S&P 500 Index is a stock market Index tracking the stock performance of the 500 largest companies listed on stock exchanges in the United States. The MSCI All Country World ex-US index tracks developed and emerging-market foreign stocks. The STOXX Europe 600 is a stock index of 600 components representing large, mid and small capitalization companies among 17 European countries.
Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.
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