Domestic equities have significantly outpaced their international counterparts for the past four years. For those who haven’t regularly revisited their asset allocations, this otherwise welcome trend in U.S. markets may have left them underexposed to equities from abroad (see “Dangerous drift,” below).
Given the breadth and depth of international markets, where’s an investor looking to shift money out of the U.S. stock market to turn?
Old World values
Over the past 10 years, eurozone stocks have returned a compound annual growth rate of just 1.3%, underperforming every other region except Japan.1 However, there’s reason to believe that the headlines concerning the eurozone might be worse than the reality on the ground for four reasons:
- Last year’s 2.4% increase in gross domestic product (GDP)2 was the strongest rate of expansion since 2007. True, stocks pulled back when growth took a step back earlier this year, but the causes—bad weather and a supply chain stretched to the breaking point—.
- If core inflation (excluding energy and food) remains muted, the European Central Bank is not expected to raise interest rates until the second half of 2019—meaning businesses and consumers will continue to benefit from low borrowing costs. Fresh fiscal stimulus may also be in the offing: Several major European countries have instituted or are considering tax cuts.3
- . French voters overwhelmingly voted for Emmanuel Macron over staunch nationalist Marine Le Pen in the country’s presidential election in 2017, and German voters handed Angela Merkel a fourth term as chancellor earlier this year. What’s more, ,4 taking some of the steam out of an issue that has threatened to undermine the economic bloc.
- While many are rightfully concerned about a full-blown trade war between the U.S. and its major trading partners, the talks haven’t yet translated into binding trade policies. And although companies in both markets garner 16% to 17% of their revenues from the other, the vast majority of trade that occurs in the region is among those within the economic bloc.
Proceed with caution
There are still longer-term trends that investors should watch to keep from going overboard on eurozone equities—including low to no growth in the workforce and a steady reliance on slow-growth industries, such as materials and telecommunications.
That said, those looking to rebalance their portfolios could benefit from the eurozone’s more-positive trends by reinvesting some of their U.S. gains in European equities.
1MSCI EMU Index, based on total return in U.S. dollars as of 12/31/2017.
3Bloomberg.com and ft.com.
4Steven Erlanger and Katrin Bennhold, “E.U. Reaches Deal on Migration at Summit, but Details Sketchy,” nytimes.com, 06/28/2018.
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