International Stocks Are Getting More Interesting

TERADAT SANTIVIVUT

By Walt Czaicki, CFA & Jillian Geliebter, CAIA

For respective years, US stocks person outperformed equities overseas. But evolving conditions successful world superior markets could alteration that. US investors who person avoided non-US stocks whitethorn want to return a caller look astatine their allocations.

Stocks person posted coagulated gains since they started to retrieve from past year's achy crash. The MSCI EAFE Index of developed-world stocks extracurricular nan US surged by 26.8% from October 2022 done nan extremity of January 2023 successful US-dollar terms, outperforming nan S&P 500's 14.3% gain. Four months doesn't needfully awesome a durable trend. However, since US stocks outperformed world stocks for 8 of nan past 10 years, galore investors are rightly asking whether return patterns whitethorn displacement this year.

Several developments are challenging nan US equity market's supremacy. In particular, a weaker US dollar and nan world implications of China's reopening are supporting equities extracurricular nan US, while respective cardinal banks are farther on than nan Fed successful their monetary argumentation tightening phases. Market valuation dynamics could adhd different impetus for world stocks.

US Dollar Depreciation May Favor Non-US Stocks

For astir of 2022, nan US dollar strengthened sharply against awesome currencies. The dollar's appreciation was driven by nan US Federal Reserve's fierce interest-rate hikes, aimed astatine curbing a spike successful inflation. But since nan extremity of September, nan dollar has weakened. While it's still excessively soon to state that nan dollar's downward trajectory will beryllium sustained, nan caller weakening is wide seen arsenic a consequence to softer ostentation readings. The marketplace anticipates that a much meaningful diminution successful ostentation will lead nan Fed to easiness its rate-hiking argumentation and, eventually, whitethorn lead it to statesman taking rates down.

That matters for world stocks. Our investigation shows that erstwhile nan dollar was weaker complete nan past 20 years, non-US stocks tended to outperform US stocks (Display). The weaker dollar creates beneficial effects for immoderate countries and prime stocks successful world markets. And rate fluctuations will facet into returns for US investors who ain world stocks, which are worthy much aft they're converted backmost to a comparatively anemic US dollar.

US Dollar: Further Weakening Could Favor International Stocks

Federal Reserve Economic Data, Morningstar, MSCI, S&P, and AllianceBernstein

Past capacity does not guarantee early results.

A weaker dollar play denotes a little value inclination successful nan worth of nan US dollar comparative to different overseas currencies successful nan Nominal Broad U.S. Dollar Index.

As of January 31, 2023

China's Reopening Could Offset Recessionary Pressures

Policy trends that thrust rate moves and macroeconomic maturation disagree astir nan world. In China, for example, ostentation remains comparatively low, which should alteration authorities to proceed pinch stimulus policies that could thief revive growth. The recent accelerated reopening pursuing COVID lockdowns should thief boost nan system and consequence assets; this has helped Chinese stocks surge backmost to life successful caller months. Similarly, emerging-market stocks whitethorn use from Chinese maturation and improved conditions driven by nan world's accommodation to higher ostentation and liking rates.

The merchandise of pent-up request successful China could thief support nan world system astatine a delicate moment. China is nan European Union's biggest trading partner. And China's biggest trading partner is nan 10-member Association of Southeast Asian Nations (ASEAN), while 4 Asian countries that are not ASEAN members are among China's apical 13 trading partners. The reopening could easiness proviso concatenation pressures crossed nan region. Asian economies could besides use from a activity of Chinese tourism. While these trends whitethorn complicate efforts to bring world ostentation down, they would besides thief offset immoderate of nan recessionary pressures astatine play.

Gauging Regional Return Potential

Companies that whitethorn use from these trends tin beryllium recovered successful different parts of nan world. Equity investors will want to make judge that their valuations are attractive, considering P/E multiples person expanded from year-end 2022 levels because of marketplace gains early this year. In world developed markets and emerging markets, stocks person been comparatively inexpensive versus US stocks for immoderate time. But that mostly didn't construe into amended returns during an era erstwhile US markets were driven by a persistent request for mega-cap, high-growth stocks, pinch debased ostentation and liking rates a worldly tailwind for galore of those years.

Now, arsenic nan marketplace situation evolves, nan scenery of imaginable opportunity warrants a person look.

The net consequence premium (ERP) is an important gauge astatine a clip erstwhile liking rates are quickly adjusting to nan inflationary environment. This metric captures a market's net output minus nan 10-year location authorities enslaved output to measure nan attractivity of consequence assets specified arsenic stocks versus lower-risk assets specified arsenic authorities bonds-a higher ERP indicates a much charismatic imaginable finance opportunity. Our investigation suggests that nan ERP looks particularly charismatic for non-US stocks (Display). In respective European countries and Japan and Canada, nan ERP is presently substantially higher than successful nan US and higher than each country's semipermanent average.

International Equities: Evaluating Opportunities Around nan World

Bloomberg, FactSet, Goldman Sachs Global Investment Research, MSCI, S&P, STOXX, TOPIX, and AB

Past capacity does not guarantee early results.

*Equity consequence premium is calculated arsenic respective state net yields minus 10-year authorities enslaved yields. The mean is nan clip framework 2005-2022.†Non-domestic revenues based connected equity benchmark. Europe is represented by STOXX 600 Index, Japan by TOPIX, nan US by S&P 500, and emerging markets by MSCI Emerging Markets

Left show arsenic of December 31, 2022; correct show arsenic of December 31, 2021

How tin investors position themselves to seizure this return potential? Don't beryllium tempted to activity location exposures that bespeak world macroeconomic conditions, which are notoriously difficult to predict. And nan domicile of a institution isn't needfully a reflection of its location country's macroeconomic circumstances. European companies make 58% of their gross from extracurricular nan region (Display above). Japanese and US companies besides waste important volumes to customers abroad. As a result, gross and net maturation imaginable will often beryllium wished much by world manufacture dynamics than by ostentation and GDP astatine home. So portfolios based connected non-US companies should usage basal investigation to measure nan sources of a company's gross and nan forces driving its business.

Disciplined banal action tin thief investors execute effective world diversification successful different types of world equity portfolios suited for individual investor consequence tolerances. To beryllium sure, US stocks still connection coagulated semipermanent return imaginable and stay an integral constituent of a US investor's strategical allocation to consequence assets. But for US investors seeking to dip a toed into world markets aliases grow world allocations, nan clip whitethorn beryllium correct to revisit location diversification.

The views expressed herein do not represent research, finance proposal aliases waste and acquisition recommendations and do not needfully correspond nan views of each AB portfolio-management teams, and are taxable to revision complete time.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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