5 reasons to think international now 5 reasons to think international now https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\globe-europe-small.jpg June 9 2020 May 28 2020

5 reasons to think international now

With the bottom appearing to be in, there's nowhere to go but up.
Published May 28 2020
My Content

With much of the global economic data as ugly as it’s been in the post-World War II era and consensus firmly in the bear camp, why should equity investors think international? We can think of five reasons:

  • The recovery from Covid-19 cases is well underway Six weeks ago, Spain and Italy were reporting 6,000 new coronavirus cases and over 700 deaths a day. Today, they are reporting fewer than 300 new cases and 100 deaths a day. Overall, many European and Asian countries have successfully “flattened the curve” and are starting to reopen their economies.
  • Don’t fight the Feds (and governments) The response by central banks and governments has pumped unprecedented amounts of stimulus into the global economy, with new moves this week by the European Union (EU) and Japan bringing their respective efforts in line with those of the U.S., at roughly 40% of the size of the eurozone and Japanese economies. Much as our nation’s first Treasury secretary piloted the effort to have the federal government bail out the states by taking over their Revolutionary War-related debts, the EU is having its “Hamilton” moment as it seeks to assist struggling southern tier countries from the worst of their virus-related problems.
  • Multiple green shoots in China Manufacturing is recovering, auto sales are snapping back and industrial production is rising in the world’s second-largest economy, the first to be hit by the pandemic and the first to begin recovery. The service sector’s comeback has been much slower, however, as unemployment remains high and retail sales have yet to bounce back. As China’s improving economy reignites international economies such as Germany, Japan and emerging markets, many international markets stand to benefit.
  • 2021 growth and earnings forecasts Everyone knows 2020 will be a disaster. But GDP and earnings-per-share for next year are projected to snap back at a faster pace for much of the world relative to the U.S., according to Cornerstone Macro and International Brokers’ Estimate System (IBES) estimates. Valuations also look much more attractive overseas, with forward price/earnings multiples well below those of the U.S.
  • Mean reversion As measured by returns on the S&P 500 relative to the MSCI EAFE Index, U.S. stocks have outperformed the rest of the world for the past 10 years. History suggests after long periods of such outperformance, relative stock returns between countries tend to narrow as returns revert to the mean.

With the U.S. market having firmly bounced off March’s bear-market low, everywhere I go, I hear the same narrative—why should I think international? Because whenever consensus is so strongly behind one thing, history has shown that it may be time to start thinking about going the other way. As the five points above suggest, that time may be now.

Tags Coronavirus . International/Global . Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

MSCI Europe, Australasia and Far East Index (EAFE) is a market capitalization-weighted equity index comprising 21 of the 48 countries in the MSCI universe and representing the developed world outside of North America. Each MSCI country index is created separately, then aggregated, without change, into regional MSCI indices. EAFE performance data is calculated in U.S. dollars and in local currency.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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