Looking back through my older writing, I found an article I wrote in 2017. The article had an official-sounding title, “International Investing – What Investors Need To Know.” (I guess I was more serious back then.) The article made the case for investing in stocks outside the US.
I made the following points:
- Solid investments outside the US: Over half of the world’s investing opportunities are based outside the United States, with major multinational corporations headquartered internationally. There is no reason to ignore these companies.
- Growth opportunities: Many of the world’s fastest-growing economies are outside the US, offering the chance to invest in innovative and successful global companies.
- Good historical performance: The performance of US and international markets tends to alternate, with no clear long-term winner between the S&P 500 Index and the MSCI EAFE Index.
- Attractive valuations: International and emerging market stocks often have more attractive valuations compared to US stocks.
- Diversification benefits: US and international stock markets do not act in perfect lockstep. When investments act differently, this often leads to a smoother ride.
- Potential benefits of currency fluctuations: Currency fluctuations can add (or subtract) to investment returns.
So how good was the advice? It was GREAT… for 2017. Unfortunately, international stocks did well but did not keep up with the performance of US stocks in 2018, 2019, 2020, and 2021.
Although I have sounded like a broken record, I still agree with each of the points I made in that article five years ago. (This is not always the case, as I continue to learn and change my thoughts on the investment world.) It turned out that US companies did really well from 2018 through 2021 and the US Dollar appreciated (which hurts international stock returns) during that window. The trend has reversed as international stocks have outperformed US stocks in 2022 and so far in 2023.
My interest in global investing does not mean that I’m avoiding US stocks. US stocks continue to make up the largest part of the stock portion of client portfolios, and I have no plans to change that. However, I commonly see recommended portfolios with little international exposure, and I believe this is a mistake – especially for the next several years.
Let me show you three charts that start to explain why I’m excited about international stocks today:
Valuations are much better outside of the US. The chart below shows my favorite valuation number (CAPE ratio) for US and international stocks. Today, US stocks are pretty expensive and trading above their typical average. International stocks, on the other hand, are trading at levels below their historical averages. We like buying groceries, houses, and clothes when they are on sale; the same should be true with stocks. Today, US stocks are the shiny expensive item in the store’s front window, while international stocks are the more reasonably priced items on the discount rack.
The trend is on the side of international stocks. The chart below shows the outperformance cycles of US vs. international stocks. The 50-year chart plainly shows an unusual dynamic: US stocks outperform for a while (grey “hills” in the chart), then international stocks (purple hills) take their turn, then US, etc. From the end of the Global Financial Crisis (2009), US stocks took a very long turn that ended last year. It’ll be interesting to see how long international stocks will lead the way from here.
The Dollar could drop back down to more typical values. The chart below shows an index of how the US Dollar compares to currencies worldwide. US stocks tend to outperform when the index is low, and the opposite is true when the index is high. Currency fluctuations have an impact on international stock returns. When the price of the Dollar rises compared to the price of the Yen, Pound, Euro, etc., international stocks struggle with currency translation. With the Dollar recently falling from 115 to 110, we’ve seen international stocks benefit. While nobody can predict currency fluctuations, I think the negative currency effects might be behind us and we could see some benefits.
As I look back at that article from five years ago, it’s good to see that the fundamentals of international investing remain relevant today. While US stocks have performed exceptionally well in recent years, international stocks have started to outshine them. I believe we can see that trend continue for several years. I have your portfolio positioned accordingly.