International Stocks: Poised for Growth
Author: Nick Withrow
From January 2011 through July 2017, U.S. stocks gained an astonishing 122 percent, while developed-world stocks gained 37 percent and emerging markets were up only 9 percent.1 At first glance, U.S. stocks look like the more favorable option given the sizeable performance differential.
However, examining a broader time frame reveals international stocks also have had extended periods of outperformance, most recently during the 1980s and 2000s. From 1970 to 2016, U.S. stocks returned 7.5 percent, while international stocks returned a similar 7.3 percent.2 While U.S. stocks have outperformed over the past six years, there are reasons to believe international stocks are poised for better results in the future, including:
- Longer-term price earnings ratios reflect international stocks’ lower valuations versus U.S. stocks. Markets with lower valuation ratios tend to have higher average returns going forward. On the other hand, markets with higher valuations tend to have lower forward returns. Corporate earnings in foreign markets began to tread higher in 2016, recovering after a multiyear decline. Increasing earnings could provide a tailwind for international stock prices.
- Investors’ sentiments towards international stocks can be judged by how much money has been recently invested. Investors are increasing their holdings in international stocks. From January through July 2017, $157 billion was invested in international exchange-traded funds and mutual funds.3 Investors are feeling much more comfortable about the prospects for international stocks and could allocate more capital in the future.
While future movements in the global stock market are unpredictable, there are positive factors supporting international stocks. With attractive valuations, improved earnings and positive sentiment, patient and disciplined investors could benefit from the improving fundamentals of international stocks.
1 Morningstar, Inc. as of July 31, 2017
2 Morningstar, Inc. as of December 31, 2016
3 Morningstar, Inc. as of July 31, 2017
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