Time to explore investments abroad
International stocks: Why bother?
For the greater part of the past decade, it hasn’t paid to invest abroad. U.S. stocks beat their overseas counterparts in eight of the past 10 calendar years.
But it may pay to bother now. The stars are aligning for foreign shares. Inflation is easing, for a start, in much of the developed world and some emerging countries. “A lot of last year’s headaches — higher inflation and rising interest rates—should subside throughout this year,” says Nicole Kornitzer, manager of Buffalo International, “so the big question is how much of those rate hikes will flow through and cause a recession” and how bad the downturn will be.
But the economic outlook this year may not be as gloomy as economists once thought. Though the International Monetary Fund expects global growth to slow to 2.9% this year, down from an estimated 3.4% in 2022, many market strategists and economists think that in certain key markets, particularly the eurozone, any recession will be shallower than originally expected. Some say Europe may avoid a recession entirely.
What’s more, foreign shares are cheap — cheaper than they have been in 15 years relative to U.S. stocks, according to some calculations. The dollar is weakening, too, which can be a boon for emerging markets.
And then there’s China. It’s still the world’s growth engine. Thanks to its early January reopening, international markets are off to a great start this year. In the first month of 2023, two broad MSCI benchmarks, the EAFE and the Emerging Markets index, logged gains of 8%
— or close to it. The MSCI China index climbed 12%. And markets in Germany and Korea, which strategists say will benefit most from China’s reopening, gained more than 12%. The S&P 500, by contrast, is up 6%.
Many strategists predict this trend will continue. “We expect international stocks to deliver a superior return to the S&P 500 over the next several market cycles,” says Mark Haefele, UBS chief investment officer of global wealth management.
In other words, it’s time for American investors to pack up their stay-at-home strategy and go abroad. Indeed, many investors are already rushing in, particularly in emerging markets.
But investing in foreign markets can be tricky. Uncertainty lingers about just what will happen with global economies. The war in Ukraine continues. And investors tend to be fickle about international stocks.
“People get very hot and very cold quickly” about foreign stock markets, often with little due diligence, says David Marcus, chief executive of Evermore Global Advisors.
And international investing comes with an extra set of challenges, given the array of different countries, and their currency, regulatory and political risks.
On top of that, emerging markets carry greater liquidity risk, meaning it’s not always easy to buy or sell securities quickly and efficiently.
So, dip in slowly. “While we expect elevated levels of volatility to persist for the foreseeable future, we also see opportunities for investors amid the fog,” says Ben Kirby, cohead of investments at Thornburg Investment Management.