Is It Finally Time For International Markets?

January 11, 2017 | Print View

US markets have been on a steady climb since they bottomed in March of 2009, and hit new highs again in 2016. A good US economy along with strong corporate profits have propelled US stocks higher by over 250% (total return including dividends) since the bottom. But US stocks only make up approximately one-half of the global stock markets. The other half of the global stock market pie consists of international developed and emerging markets. In the chart below you can see how international developed markets (green line) and emerging markets (blue line) have lagged US stock markets (red line) since the end of the financial crisis:

Chart: Stockcharts.com

US markets are well ahead of their highs of 2007, but international markets are still underwater and continue to be mired in their own lost decade. The under-performance has been due to a variety of factors including:

Steep declines in commodity and energy prices
Weak and volatile currencies versus the US dollar
Slow or slowing economic growth versus the US
Hesitancy to apply stimulative central bank monetary policy

These factors have led investors to flee international markets in favor for the US markets to the point where they are generally underweight international stocks. See the chart below illustrating much larger 2016 US fund flows versus global fund flows:

Chart: State Street Global Advisors

International equity markets are also cheaper than US markets right now. See the chart below highlighting global stock market valuations versus their historical averages:

Chart: JP Morgan Asset Management

Looking forward we see several of these factors stabilizing, suggesting that a rebound in international stocks may be on the horizon. Our observations include:

Economic growth in Europe has become more widespread and sustained
Weak currencies in international markets help boost local company exports
GDP growth rates bottoming in emerging markets
Continued stimulus from Japanese, Chinese and European central banks

Based on improving economic growth and cheaper valuations, international markets may prove attractive for US investors going forward. Gradient Investments recently introduced a new portfolio to help gain exposure to these dynamics called the “Gradient 40 International Stock Portfolio” or G40-I. The G40-I is an actively managed portfolio designed to provide exposure to international markets through individual stocks and ETFs. The G40-I will consist of:

40 individual security selections (stock and ETF) each holding a 2.5% portfolio weighting
Blue chip, industry leading companies domiciled outside the U.S.
A generous and consistent dividend income stream
Companies that trade on US market exchanges in ADR (American Depository Receipts) form

In our opinion the G40-I is an excellent portfolio for those looking to gain international stock market diversification, and is a nice complement to the US based “G50” dividend paying portfolio. The G40-I may be a good fit for the growth investor focused on enhancing long term returns through global diversification. Please don’t hesitate to contact Gradient Investments to discuss the merits of international investing and the benefits of using the G40-I in a household allocation.