Is Now the Time to Invest in Non-U.S. Stocks?

Is Now the Time to Invest in Non-U.S. Stocks?

A recent article in The Wall Street Journal ponders whether it now makes sense for investors to look to stocks in foreign developed and emerging markets—after their long stretch of underperformance.

“Now, the question is whether valuations, along with shifting global economic fundamentals, make foreign stocks an attractive investment—perhaps finally justifying the long-held advice that U.S. investors keep at least a portion of their portfolios in overseas shares or funds.”

The article notes that, with regard to the ongoing pandemic, “many countries are further along than the U.S.” which has helped put their economies in a stronger position than the U.S.—which, in turn, is being reflected in earnings forecasts. It cites a poll of FactSet analysts that reflects the view that predicted earnings for companies in the MSCI Emerging Markets Index will “fall less than earnings for companies in the U.S. S&P 500 index this year.”

According to one financial adviser from Cerity Partners, emerging markets “have young and vibrant economies, growing faster than developed markets” and also promise faster-growing labor pools given their younger populations. According to PNC chief investment strategist Amanda Agati, several emerging markets countries have also handled the pandemic particularly well: “South Korea is the gold standard,” she said, adding, “This is a tailwind for emerging markets, though not every country has been perfect.” Conversely, she notes that many developed countries are seeing signs of a potential second wave of virus infections. The U.S., on the other hand, she argued, “is still struggling with that initial wave.”

The article notes that foreign stocks could also be bolstered by weakness in the U.S. dollar, since “foreign stocks gain value in dollar terms when the dollar is falling. “

According to Charles Schwab chief global investment strategist Jeffrey Kleintop, psychology plays a big role: “After a decade, whatever markets led in investor expectations get high in value, and then recession resets expectations. Where expectations were highest, valuations come down the most.” He anticipates foreign stocks to outpace U.S. shares for the next decade. Regarding allocation, Kleintop advises investors to keep it simple, perhaps including one broad exchange-traded fund for developed markets and one for emerging markets, thus affording themselves the opportunity to adjust weightings between the two. He says, “Rebalancing now [toward foreign stocks] is more important than anytime in the last decade.”