3 Reasons to Explore International Stocks Now
International stocks have been outperforming their U.S. counterparts recently, marking the possibility of a cyclical comeback.
3 Reasons to Explore International Stocks Now
International stocks have been outperforming their U.S. counterparts recently, based on a one-year rolling return. Could they be due for a cyclical comeback?
In this graphic from New York Life Investments, we explore why current economic conditions make it more likely that international investments could boost a portfolio’s return.
1. Diversification Amid an Uncertain Economy
The U.S. economic outlook is uncertain, and this could lead to lower returns in U.S. markets.
In fact, investment firms predict that U.S. stocks could see an annualized return of 6.7% over the next 10 years, compared to 9.4% for developed market stocks. This is based on an average of capital market assumptions from six investment firms published at the end of 2022.
Historically, international stocks have generated better returns when U.S. stocks have seen poor long-term performance. As seen in the below table, in the wake of the global financial crisis, international equities’ 10-year returns were 17% higher than U.S. equities on average.
Source: Yahoo Finance and MSCI, 07/04/2023. The time period shown is the only time when 10-year rolling returns for the S&P 500 Index were less than 50%.
Adding exposure to international investments may help boost return potential when U.S. equities are underperforming on a long-term basis.
2. Valuations are at Historical Lows
International equities are currently trading at 20-year lows relative to U.S. stocks, which could present attractive opportunities.
In fact, the relative P/E ratio for international equities is 30% below the long-term average.
Source: Factset, 06/30/2023.
Importantly, some surveyed asset managers believe these lower valuations will fuel the outperformance of international investments over the next decade.
3. U.S. Dollar Dropping From September 2022 Peak
During six of the last seven periods of a weakening U.S. dollar, international equities have outperformed U.S. stocks.
Source: MSCI and Yahoo Finance, 07/04/2023. Periods of a weakening U.S. dollar were calculated using the ICE U.S. Dollar Index.
If the U.S. dollar continues to weaken, history indicates that international investments could deliver higher returns.
Expanding to International Stocks
Current economic conditions signal that now may be a good time for investors to consider international investments.
Uncertain economy: Exposure to international equities may help boost returns when long-term U.S. stock performance is lagging.
Low valuations: International equities are trading at a discount to U.S. stocks, indicating there could be buying opportunities.
Weakening U.S. dollar: In six of the last seven periods when the U.S. dollar was declining, international investments outperformed U.S. stocks.
By owning stocks outside the U.S., investors can take advantage of attractive prices and diversify their portfolio.