While U.S. stocks could continue to grind higher, it may be time to look abroad. Although the international markets still have to work through a fair number of issues, foreign equities look like attractive potential bargains right now.
Way back when the financial crisis hit, European markets fell to valuations cheaper than those in the U.S., and since then, economic recovery has been stronger domestically than internationally. As a result, the STOXX 600 index, which tracks the return of the 600 largest stock exchange listed companies out of 18 European countries, is trading at a multiple that's 16% lower than the S&P 500 Index here in the U.S.
If that’s not a compelling reason to look abroad, here are a few more:
- The Eurozone is looking stronger as economic growth across Europe has been picking up. Fiscal stimulus and easy monetary conditions are supporting spending in the region. GDP recently expanded 3.3% over the same period of the previous year in the first quarter, above the 2.8% increase recorded in the fourth quarter of 2016, which happens to be the best result in nearly a year.
- The euro has declined over -32% against the dollar since August of 2008 and is cheap compared to other global currencies. A cheap euro should be a tailwind for European companies. It translates into cheaper exports for them and could provide a boost to the earnings-per-share of export-oriented companies.
- There are increasing signs that deflation risks are abating due to the European Central Bank’s massive monetary stimulus program. Consumer prices are rising in almost all of the Eurozone countries - the region is experiencing the fastest consumer price growth in more than three years.
- The outlook for corporate profits is more optimistic. There's been a positive turnaround in earnings revisions, which have reached the highest level in five years. The improved earnings performances are being delivered by sales increases rather than cost initiatives, according to BlackRock.
- Investor sentiment towards Europe is more tepid compared to the U.S. markets. Typically, sentiment is used as contrary indicator. It's always a great contra indicator when enthusiasm is too high or pessimism is too low. Bullishness is at very high levels in the U.S. and low levels in Europe.
After what some pundits have termed a “lost decade” economically, Europe now offers potential bargains to investors. A well-diversified portfolio should span geographies as well as the different sectors of the market, and International equity should most certainly be a component of your investing strategy.
U.S. and International markets exchange leadership positions over time, so investors shouldn’t assume that the U.S. will continue its decade-long outperformance indefinitely. Now may be a good time to increase your exposure to the International markets.