FOREIGN STOCKS MAY ‘OUTPERFORM’ U.S.

Investors may look for better values in parts of Europe and Asia next year as their fundamentals appear to be improving

EVEN though the United States stock market continues a record-breaking rally that has sent the benchmark S&P 500 index up nearly 25 per cent for the year, investors appear to be looking elsewhere for better values in the year ahead.

World stock funds brought in US$8.2 billion in investor inflows over the last two weeks, breaking a losing streak that dated back to early September, according to Investment Co Institute data.

US equity funds, meanwhile, lost more than US$10 billion in outflows over the last two weeks, extending a retreat that has spanned seven of the last eight weeks.

The move into overseas stocks comes as economic fundamentals appear to be improving in parts of Europe and Asia while US growth lo oks to be slowing, drawing money away from a market that had been an out perfomer.

Even with the MSCI All World Country Index, which tracks global equities, nearing record highs set in January last year fund managers and analysts say global stock markets still offer a better chance to outperform US stocks in the year ahead.

The cite significantly lower valuations after failing to keep pace with the US equity market for much of the last decade.

The forward price-to-earning (P/E) ratio for the broad Stoxx 600 index, for instance, is 15.4, well below the 19.3 forward P/E of the S&P 500, Refinitiv data showed.

Any narrowing of that large gap in valuations could be a driver, even for companies that have strong stock performance this year, said Thomas Banks, a portfolio manager for the Federated International Small-Mid Company fund who has been increasing his stake in European firms.

He remains bullish on companies such as London Stock Exchange Group Plc and Swedenbased casino game operator Evolution Gaming Group AB, both of which are already up 50 per cent for the year to date.

“Some of the higher valuations for US shares has been warranted because the US had a much faster growth rate. But going forward if there’s a trade deal announced or an amicable solution to Brexit, the divergent growth rates could converge again” as US growth slows, said Banks.

The US economy grew at a 1.9 per cent annual rate in the third quarter, down from 3.1 per cent during the first three months of the year.

The European Commission expects the economy in the euro zone to expand at an annual rate of 1.2 per cent over the course of next year, defying market expectations that growth rates would continue to fall from four-year lows last year.

Germany grew 0.1 per cent in the third quarter after contracting 0.2 per cent in the previous three months, easing fears that the bloc would fall into a recession.

Further declines in the US growth rate will also likely bring down the value of the dollar, which has hovered near record highs and eaten into the returns of investing in overseas markets, said Banks.

Danton Goei, portfolio manager of the Davis International fund, said more attractive valuations are pushing him into Asian stocks and multi-national companies that are positioned to benefit from domestic consumption in India and China.

He is bullish on Chinese companies that are not highly dependent on trade such as tech giant Tencent Holdings Ltd and forprofit educational company New Oriental Education and Technology Group Inc.

“You can see that the trade war has had a very limited impact on their businesses and yet valuations have come down a lot because of the macro concerns. When you have very strong businesses and their valuations are falling for unrelated reasons, that appears like a good buying opportunity,” said Goei.

At the same time, he is adding to positions in companies such as French aircraft engine maker Safran SA, which he expects to benefit from growth in the Indian travel market as more consumers enter the middle class.

Shares of the company are up 41 per cent for the year to date, yet still trade near their lowest priceto-earnings ratio over the last 12 months.

“The big difference in valuations matters in terms of your likelihood of outperforming in the future,” he said.