International calling

E*TRADE Securities2

09/28/17

U.S. stocks have given investors plenty to cheer in 2017. Record high after record high will do that. But as well as domestic equities have performed, investors may want to check in on the momentum story in international equities.

Home is often where the heart is. So it makes sense that many investors show a strong preference for stocks in their country, or a home bias. Sometimes, though, that bias can lead to missed opportunities.

Investors with international exposure in their portfolios are probably quick to point out that the S&P 500’s® 11.98%1 return this year is short of the MSCI World ex USA Index’s 15.51%2 and the MSCI Emerging Markets Index’s 25.08%.3  

S&P® vs. the world in 2017

Source: S&P and MSCI

Why the outperformance? Catalysts could include:

  • The U.S. dollar’s tumble and corresponding foreign currency appreciation, as well as a strengthening global growth story, helped by longstanding central bank support.
  • Recovering commodities prices over the past few months, which may have helped developing nations like Brazil gain steam.
  • A growing technology theme, with the emerging market tech sector rallying more than 50% this year. That means it’s had a big say in the MSCI EM Index’s performance, given that it now comprises 27% of the index’s market value.4 For its part, U.S. tech is roughly 24% of the S&P 500 and in 2017 is up about 25%.5
MSCI EM Asia, EMEA, and LatAm indexes

Source: MSCI

All this noted, Vice President of Investment Strategy Mike Loewengart offered some words of caution: “If there are any certainties in investing, it’s that all investments come with risks. Many investors who have gone the international route can speak to often unstable geopolitics and policy, not to mention swings in commodity prices.”

Of course, there are currency considerations as well:

  • Exchange rate risk, defined as the possibility that currency depreciation reduces the value of a security denominated in foreign currency, can be a drawback for investors looking into foreign exposure.
  • The other side of that argument is that foreign currency exposure provides the benefit of additional diversification.
  • And investors have choices. For example, exchange-traded funds can help ease investor’s skittishness about foreign markets, offering exposure by region, country, market cap, sector, and even a hedge to foreign currency.

Bottom line

While past performance is not indicative of future returns, adding foreign assets to an investment mix could be a way to find exposure to attractive valuations and robust growth potential. Regarding the latter, a recent report had emerging markets representing more than 50% of global gross domestic product, but only about 10% of stock market capitalization, which suggests there could be room for these markets to run higher over the long term.6 There are risks, yes. But there are ways to reduce risk with asset allocations reflective of time horizon and investment goals.

 

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1. As of September 27, 2017, according to http://us.spindices.com/indices/equity/sp-500. The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the US stock market.

2. As of September 27, 2017 according to https://www.msci.com/end-of-day-data-search. The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the U.S.

3. As of September 27, 2017 according to https://www.msci.com/end-of-day-data-search. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 23 emerging markets country indexes.  

4. Wernau, Julie. “The Tech Stocks Fuel Emerging-Markets Rally,” The Wall Street Journal, 19 Sep. 2017. https://www.wsj.com/articles/emerging-markets-soar-thanks-to-tech-stocks-just-like-in-the-u-s-1505837137

5. As of September 27, 2017 according to http://us.spindices.com/indices/equity/sp-500-information-technology-sector-zar.

6. Carlson, Ben. “Think Global to Avoid Shrinking U.S. Stock Market,” Bloomberg, 17 Mar. 2017. https://www.bloomberg.com/view/articles/2017-03-17/think-global-to-avoid-shrinking-u-s-stock-market

Note: Investing in emerging or developing markets involves exposure to economic structures that are generally less diverse and mature, as well as to political systems that can be expected to have less stability than those of more-developed countries. These securities may be less liquid and more volatile than investments in U.S. and longer-established non-U.S. markets.