Investors see overseas equities outshining US
Even though a steady stream of money has flowed out of US stocks into overseas markets, investors expect European and emerging-market equities to rise further, supported by expectations for economic growth and accommodative central-bank policies.
US fund investors put the most money into overseas equities since the second quarter of 2015, with more than half of the $90 billion outflows for the first half coming in the second quarter, according to preliminary Lipper data.
The MSCI Emerging-Market index has risen 17% year-to-date, compared with a 4.9% rise for Europe’s Stoxx 600 index and the S&P 500 index’s 8.0% gain.
Since emerging-market central banks have been lowering interest rates and their currencies have been falling in recent years, this is now helping to boost economic growth, according to Northwestern Mutual chief investment strategist Brent Schutte.
But the emerging-market index still is roughly 25% off its all-time high reached in 2007, while the Stoxx 600 is 8.0% off its record high. In comparison, the S&P 500 is just 1.0% below its latest record reached this June.
The overseas indexes could reach new record highs over the next two years, according to Jack Ablin, chief investment officer at BMO Private Bank in Chicago, who cited improving growth.
“Finally the recovery has really picked up in the rest of the world,” he said. “It’s moving along faster than the US because it’s trailed. The US is further along because the central bank here really was aggressive in quantitative-easing first.”
For the second quarter, revenues for companies in European markets are expected to grow 5.8%, compared with 4.6% for S&P 500 index companies and 11.5% for emerging markets in the Asia Pacific Region, according to Reuters data.
Earnings estimates for European companies for the period stand out with a 13.5% jump, compared with 8.0% growth for the S&P 500 and 6.4% for emerging markets.
Northwestern Mutual’s Schutte said his company is betting that outperformance in emerging-market and European stocks should continue. He cited a one- to two-year time frame for investment in euro-zone stocks in particular.
His firm started moving money into non-US stocks around February 2016 when it replaced investments in US real-estate investment trusts with equities in international developed markets in expectation of improving earnings growth.
However, not everybody is convinced that the attraction of European stocks will last as long. John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey, was wary of predicting European outperformance beyond the next quarter.
He expects strong earnings growth in both Europe and emerging markets this year. But Praveen said potential headwinds in Europe could include a pullback in European Central Bank monetary-policy accommodation or uncertainly around a national Italian election, required by the end of the first half of 2018.
But for now, he said: “Their earnings outlook is stronger, and their central bank is still providing quantitative-easing liquidity, while ours is raising rates and the Fed is starting normalization.”