Why You Should Be Investing In Foreign Stocks by Jeff D. Opdyke, The Sovereign Investor.
USA Today printed an interesting chart-of-the-day on the cover of its Money section this week. Among more than a score of investment firms, nearly two-thirds now think that international stock markets will trump New York stocks over the next year.
I’m betting the outperformance will be much longer. We’re talking five years or more.
And with the U.S. dollar at levels it hasn’t seen in a dozen years, the financial markets are giving you the chance today to trade in some of your overpriced dollars for stocks priced in foreign currencies that will see a two-pronged benefit: outpacing U.S. stocks for the next several years, and gaining additional value as the dollar declines.
Equities did well last month as most market watchers have noted that Value outperformed growth. In his March Factor Performance report, Alex Botte of Venn by Two Sigma noted that March was a strong month for the global Equity factor, especially in developed markets. Q1 2021 hedge fund letters, conferences and more He said Europe Read More
As a Sovereign Investor Daily reader, you’re already ahead of the curve. While investment managers are just now getting around to saying that international markets will outperform this year, if you’ve been following my counsel, you will have already investing in foreign stocks, establishing your positions in European and Asian markets.
European stocks are already up nearly 20% so far this year. Hong Kong’s Hang Seng, one of my favorite for 2015 because of new cross-border investment and financial ties between China and Hong Kong, is up more than 17% already. The S&P 500 is up 2%.
There are several reasons for this.
The U.S. economy is proving more lackluster than the cheerleaders have been insisting. Europe’s economies are proving more robust than the naysayers have been insisting. And Asian economies have remained healthy throughout the entire post-crisis period.
We also have a reversion to the mean underway. U.S. stocks have posted double-digit returns in five of the last six years, generating annualized gains for 14%. That’s well beyond historic norms … which explains why U.S. markets are trading at price-to-earnings ratios only seen two times before in the last century — just prior to the Great Depression, and again before the Great Recession.
A return to historical norms — which always happens — implies that U.S. stocks must underperform for the next five years or more.
International stocks have largely underperformed as the U.S. rallied. In a reversionary world, they will outperform U.S. stocks. They are the place you want to be this year and for several years into the future.
The Market Laggard
In the first 14 years of this millennium, not once have U.S. stock-market returns led the world. In years when our market tanked, other markets tanked less badly (or even rose). In years when U.S. stocks were soaring, other markets were soaring higher.
Indeed, in 2013, when the S&P 500 gave U.S. investors a near-30% return, Germany, Spain and New Zealand offered up something better. In fact, 2013 was our best showing on the league table of global returns: We placed fourth that year among a score of major international and emerging markets.
It is a point I regularly make in the conferences at which I speak. It’s all the proof any investor needs for putting some portion of your assets in overseas stocks. As good as America can be at times, America is never the best place to invest.
In a globalized world — one in which your assets are intimately tied to what happens not just here at home but in Europe, Asia, Australia and even South America — your success comes from global diversification. A savvy investor must have assets at work in other markets at all times.
Now is the time to build or add to that diversification by investing in foreign stocks.
Our dollar has rallied strongly in the last few years as the euro and yen struggled with their own internal problems. Because of that, the greenback is at levels it last visited in 2003. Against the euro, in particular, the dollar has gained nearly 30% in the last year alone — a vicious spike in the currency market.
That means that in dollar terms, you can buy European assets in the cheap … which means you are buying at bargain currency rates stocks that will outperform the returns you’re likely to see in America over the next several years.
And as the dollar reverses course — and that reversal is coming — your foreign stocks will gain value in dollar terms even if the share price never moves. Better still is that as the share price moves higher, and as the dollar falls, you returns will experience a double-barreled boost.
Now is the time for investing in foreign stocks. The dollar is overvalued. U.S. stock markets are trading at excessive valuations. And the world outside America is effectively on sale.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker