With about every major US equity index making new highs, many investors are nervous about US stocks. I don’t know if there’s an impending stock market crash, but regardless at BCM we favor foreign developed market equities for the time being. Here are a few reasons why.
- Western Europe appears to be trailing the US in terms of the business cycle. At the same time, Japan looks to be bouncing off of a technical recession. Meanwhile, the US appears to be in the late stages of expansion. This can be seen by the fact that both Europe and Japan are stimulating, while the US is tightening policy. In other words, it looks to us that both western Europe and Japan (primary components of the EAFE index) have longer runways for continued economic growth.
- Price-wise, EAFE equities have basically gone nowhere over the past five years — something like ~3% per year nominal. Meanwhile, the S&P 500 has climbed by more than 70%. Of course, price alone can be misleading. But on a valuation basis as well, the EAFE trades at about 15x (close to it’s LTA) while the S&P is over 19x (above it’s LTA).
- Currency-wise the Euro recently almost hit parity versus the Dollar, and the Yen is the weakest it’s been in a decade. The falling currency values have hurt US-based investors with foreign assets, but the weak currencies may actually help stimulate foreign economies. Also, a bounce off oversold levels (with respect to foreign currencies) could even help US dollar-based returns moving forward.
All things considered, there’s no shortage of risks. With the Euro Zone still fraught with problems and Japan still stuck in a long-term economic slump, there’s no certainty that stock markets in either region will perform. However, we do believe foreign developed equity markets currently represent better values than what we see here in the US.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.