International equities: Have investors missed the flight?Contributor Gabriela Santos
After four years of underperforming the U.S., international equities have really taken off in 2017. Year-to-date, the MSCI All Country World Index ex-U.S. is up 24% in U.S. dollars, a step above the S&P 500’s respectable 16% return. We often hear investors wondering whether they are too late to the international story.
So do we believe this is it for international equities? Actually, we think we are still in the early stages of international equity outperformance. Comparing how U.S. and international have performed since the Global Financial Crisis, it becomes clear that the recent move up abroad is still only a drop in the bucket. U.S. equities have returned over 150% percentage points more than their international counterparts during this time, with international not yet having recovered to its pre-crisis peak.
There are four strong arguments why international equities should continue delivering over the next few years: growth, earnings, valuations and currencies. First, the global economy is finally growing again, with over 90% of economies accelerating. Crucially, the U.S. is already in the ninth year of its expansion, while other countries are still in early stages. Second, this economic improvement is showing up in corporate profits, with international earnings now growing faster than those in the U.S. Third, the valuation argument also points to more upside abroad, with international close to the cheapest it has been relative to the U.S. in fifteen years. Lastly, the currency has gone from a headwind to a tailwind for international returns as a result of a weaker U.S. dollar this year, likely only the beginning of a longer move down.
The U.S. is no longer the only worthwhile place to visit. Opportunities still exist in U.S. equities, but investors should make sure they put fears aside and buy that plane ticket, especially to the Eurozone and parts of emerging markets.
After years of U.S. earnings outpacing international, a reversal is beginning
MSCI ACW ex-U.S. vs. S&P500 forward EPS, USD, Jan. 2002=100
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