Ron’s Market Minute — Why We’re Continuing to Look for Strength in Non-US Markets
Historically, over long periods of time, the returns on non-US stocks and US stocks are not that much different. However, in shorter time periods it is not unusual for either US or Non-US markets to outperform the others by 10% or more. From 2002 through 2009 non-US markets averaged about 10% more per year return than US, but for the most recent decade it’s been the US that has been the strong performer-with about a 10% per year greater return than NON-US markets.* I think there’s a decent possibility that the numbers may be flipping again in favor of the non-US countries. One of the main reasons is that the market composition is quite different outside of the US. *Source: AB Advisors March 2023 newsletter https://www.rbadvisors.com/insights/a-sea-change-in-international-markets/
In particular, while tech stocks make up a big chunk the US major market (S&P 500 Index*), technology is much less emphasized outside of the US.
The AB Advisors March 2023 newsletter says that US markets concentration in technology and tech-related sectors plus other high-priced growth stock (totaling about 43%) are pretty much the foundation of our markets. Ex-US countries have about a third less exposure to tech overall than the US. (See the chart below.)
Historically, tech sectors have performed quite well during times of lower interest rates, high liquidity, and strong growth. Today’s economic environment is quite different, and many people (including me) think there’s a good chance that higher interest rates and less liquidity (and accompanying weak growth) may be on the table for the next handful of years, at least. And so, international markets with their lower exposure to these weak sectors are looking attractive.
Chart courtesy AB Advisors
Again, looking at history, it is rather rare for cycle leadership to repeat. And the last economic cycle’s strength is rarely the next cycle’s strength. If we are correct in assuming that both inflation and interest rates are likely to stay higher for longer periods, the differences in markets composition could bump international performance vs. the US. Materials and Energy usually benefit from higher commodity price inflation. Also, after being hammered for years by low and even negative interest rates, Financials may see improved profits. Would that include Banks? Well, maybe — and we have some concern there — but it appears that political leaders seem to be committed to preventing further negative issues with that sub-sector.
Finally, International markets, at the moment, are trading at large discounts to US markets. It may not be unusual to see negative sentiment to internationals (with the Ukraine war, geopolitical issues with China, and uncertainties in emerging markets. But although we are seeing lower valuations outside of the US, our markets are still priced high, from a historical standpoint. Valuations may not be an effective timing mechanism, but they do give us some insight on the balance of risk vs. rewards- which has much relevance for longer returns.
The tide that gave us great returns over the past decade may now be turning. International market emphasis on non techs, lower valuations, and more accommodative liquidity suggest that advisors and portfolio designers may benefit from turning their focus to the growing potential opportunities outside of our country.
It’s time to say, “Watch this space”.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.
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Past performance is not a guarantee of future returns – LFS-5390884-123022