International stocks have flipped their script in the past few months – what does this mean for your portfolio?
Hi everyone, Jay Pluimer here with Flourish Insights. As the director of investments at Flourish Wealth Management, I take pride in providing our clients, colleagues, and friends with resources and information that can help them make strategic and effective choices regarding their investments. If you’ve been enjoying the show, be sure to subscribe on Apple, Spotify, Google, or wherever you get your podcasts, so you’ll never miss an episode.
Today, we are discussing why “Mr. Worldwide” is Back.
For pop music fans, the title “Mr. Worldwide” is immediately associated with the artist named Pitbull. I like his music because it incorporates a global beat and brings a lot of positive energy. It’s also fortunate that Pitbull has collaborated with a large number of other music stars because that brought a lot of depth to his music. He gave himself the title “Mr. Worldwide” based on the premise that his songs incorporated themes and genres from around the world, that he toured the world performing his music, and that as part of an immigrant family growing up in the United States Pitbull represents the American Dream of success that is generally shared around the world.
I promise that is the end of my efforts to take a deep dive into pop music culture! Today’s podcast is really about the positive returns from International Stock investments which are affirming the desire to have a globally diversified investment portfolio. We frequently reference a chart in client meetings from JP Morgan showing that US Stocks have outperformed International Stocks for over 14 years with a performance advantage of over 275%. It has been difficult to justify global diversification over that time period because US Stocks were providing better performance almost every year, and frequently with significantly better returns.
However, International Stocks have flipped the script over the past few months. The MSCI Europe Asia Far East (aka EAFE) market Index is up over 23% since November 1st of 2022 compared to 7% for the S&P 500 Index. That is the largest performance differential between these two stock market indexes over the past 15 years and the first that has demonstrably favored International stocks. Although it’s too early to tell at this point whether or not this trend change is sustainable, there are reasons to favor International stocks in the current market environment.
The past 10+ years featured low inflation and historically low interest rates, an environment that favored Growth-oriented investments. Technology and Communications stocks represent 30% of the S&P 500 Index compared to just 15% for the MSCI EAFE, so a favorable environment for Growth stocks will consistently favor US markets. However, a period with moderate inflation and moderate interest rates will favor stocks that have consistent revenues, profits, and favorable valuations (also known as Value stocks). The EAFE Index has a 47% allocation to Value sectors like Industrials, Financials, Energy, and Materials compared to 27% for the S&P 500 Index. Assuming the era of free money is over, there are reasons to add exposure to Value investments.
A sustained period of moderate interest rates is favorable for Financial Services companies like banks because they will be able to generate more revenues from loans with higher interest rate payments. In addition, most Financial Services stocks have relatively low prices due to mediocre long-term performance. Similarly, Industrial stocks have lagged due to a lack of investment in manufacturing over the past decade but the transition to “near-shoring” is adding manufacturing capabilities in India, Mexico, and Canada as companies shift away from China. The emphasis on renewable energy also means that many of the existing manufacturing facilities are being updated to be more efficient and sustainable across the globe.
The last time period of sustained International Stock outperformance was in the 2000s before the Great Recession. International Stocks outperformed by over 65% during those 7 years, which was the longest time period of outperformance by either US or International Stocks until the recent 14+ years of US stock market dominance. We have always incorporated a global stock market approach in client portfolios at Flourish with International and Emerging Markets representing 30% to 35% of the stock investments. The commitment to International Stock diversification has consistently demonstrated benefits from a risk reduction standpoint, and it would be nice if clients experience a performance benefit for the first time in the 9-year history of Flourish. Although our Investment Committee has not made a decision to actively increase exposure to International Stocks at this time, it will be an important topic of discussion in our monthly meetings as we explore tactical asset allocation opportunities.
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