U.S. investors hunt for gains in foreign stocks
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[January 14, 2023] By
Lewis Krauskopf
NEW YORK (Reuters) - Some U.S. investors are looking abroad to capture
better stock returns in the coming months, betting European and other
international stocks hold more enticing valuations after a long period
of U.S. dominance.
U.S. stocks have rebounded to start the year after a rough 2022, but
still have lagged their international counterparts. Europe's STOXX 600
index has gained some 17% since the end of the third quarter, versus 11%
for the U.S. benchmark S&P 500. MSCI's gauge of global stocks excluding
the U.S. has risen more than 20% over that time.
European stocks have benefited as a mild winter has so far helped the
region avert a feared energy crisis, investors said. Moderating
commodity prices have helped, as has the re-opening of China's economy
and a weaker dollar; some expect the strength to continue.
“Relatively speaking, we have got more money now chasing better
opportunities outside the U.S., which was not the case the last several
years,” said Martin Schulz, head of the international equity group at
Federated Hermes.
Federated Hermes said this week it is shifting from a “modestly bearish”
view on stocks to a “modestly positive” one, entirely by adding to
international markets.
U.S. stocks have long held sway over international peers. The S&P 500
rose over 460% from lows during the great financial crisis in March 2009
through last year, compared with a 170% gain for Europe's STOXX over
that time.
That period largely coincided with rock-bottom interest rates, a
backdrop that favored U.S. stock indexes which are far more heavily
weighted in technology shares than stock gauges in Europe. The tech
sector amounts to 26% of the S&P 500. The group is only about 7% in the
STOXX 600, which is far more heavily geared toward financial and
industrial shares.
But the playing field leveled dramatically over the last year, as
central banks globally raised interest rates to fight inflation. Higher
rates tend to particularly pressure the valuations of tech and other
high growth stocks while potentially benefiting banks and other value
shares heavily weighted in Europe.
"One of the secular elements that has helped U.S. equities was
unconventional monetary policies, and those have come to an end," said
Alessio de Longis, senior portfolio manager for Invesco Investment
Solutions in New York.
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Signage is seen at the New York Stock
Exchange (NYSE) in Manhattan, New York City, U.S., November 11,
2022. REUTERS/Andrew Kelly
The firm last month rotated more into international equities as it
increased its overall stock exposure, de Longis said.
International stocks were recently touted by investor Jeffrey
Gundlach of DoubleLine Capital and BofA Global Research, which
projected global stocks would "crush" their U.S peers in 2023.
Even with their recent strength, Europe's STOXX still trades at a
hefty discount, with a forward price-to-earnings ratio of 12 against
a P/E of about 17 for the S&P 500, according to Refinitiv Datastream.
That valuation gap is close to its widest ever and is over twice its
historic average.
“Every single metric that you can follow from a valuation
perspective shows that international stocks are historically cheap
versus the U.S.,” said Brent Schutte, chief investment officer at
Northwestern Mutual Wealth Management Company.
Another lift for international stocks has come from the recent
weakness in the dollar, which is down some 9% since the end of the
third quarter after a huge run. The weaker greenback benefits U.S.
investors when they convert foreign profits back into their home
currency, and some investors believe the dollar could keep sliding
if it appears the Fed is growing closer to pausing its rate
increases.
Some investors think U.S. stocks will soon resume their dominance
over equities linked to other regions. Since 2012, the United States
has tended to outperform rest-of-world equities, with an average
difference of 1.7 percentage points over a typical 50-day window,
according to Nicholas Colas, co-founder of DataTrek Research. "As
much we can see the merits of lower valuation non-U.S. equity
markets, their recent outperformance says investors should be
cautious in chasing the recent rally," Colas said in a note this
week. A widely expected global recession could be one factor that
sends investors back into U.S. stocks, which many see as a relative
haven during times of economic uncertainty, investors said. Buying
international stocks could be a "complement" to the opportunity
domestically, said Mona Mahajan, senior investment strategist at
Edward Jones. "The U.S. markets haven’t yet rebounded as much and so
I think there is still a fundamental opportunity in the U.S. to play
some catch up there,” Mahajan said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David
Gregorio)
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