Should We Be Looking at International Stocks Outside U.S., Like Emerging Markets, Europe, or China?

The S&P 500 is up more than 30% year-over-year. This performance represents an incredible turnaround from the damage caused by COVID-19. 

However, many analysts believe that U.S. stocks are overvalued. So what global markets show investors consider to make gains? Are European or Emerging Markets good future bets? Has the recent turmoil in Chinese markets left them promising hunting grounds for cut-priced stocks? Let’s dig deeper. 

The State of the Markets

In late August, and then in early September, the FTSE FTSE All-World index dropped by ten and then 15 points. There are several factors at play here, like fears over a slower COVID recovery and the future reduction in the U.S. stimulus money that many feel have contributed heavily to the stock market’s growth over the last 18 months.

Additional concerns over China’s robust data privacy rules and Australia and New Zealand’s zealous approach to a rise in COVID-19 cases have also lowered investor sentiment.

Of course, it wasn’t meant to be this way. At the start of the year, China and South Korea had made double-digit gains, and emerging markets like Indonesia and South Africa were performing strongly. Many analysts thought 2021 would be a year of market rotation.

Record Money Flows into Global Markets

2021 is set to see record inflows into global investments. According to the Bank of America, over $1 trillion is predicted to be invested in the world markets this year. Interestingly, the bulk of this money has been invested in ETFs and passive funds.        

But last year, investors pulled around $240 bn out of U.S. stock funds. And there are reasons to believe that more could leave this year. 

A vast majority of investment banks suggest that European stocks will outperform U.S. stocks. As a result, European mutual fund flows have been at their strongest for six years.

There have been positive signs for European stocks over the summer. In June, economic data for the U.S. caused investor confidence to waiver. Simultaneously, global equities set intraday highs and a record close.

Which International Markets Are Worth Consideration?

There are six commonly cited concerns for U.S. stocks. 

1) They are overvalued

2) U.S. inflation is a concern

3) Pandemic related stimulus is soon coming to an end

4) The economic data suggests the U.S. is bouncing back slower than Europe

5) New strains like the Delta variant could still cause economic disruption

6) The Biden Administration has designs on regulating and even breaking up Big Tech companies.

The S&P 500 is performing exceptionally well, but some, or all, of these factors could impact upward movement. So what other markets could prove a safe haven for investors?

European Stocks

European stocks have fallen out of fashion in recent years. While investor sentiment is pessimistic, Karen Ward at Morgan Stanley believes these low expectations present an opportunity. 

Additionally, she adds that the Fed will need to taper asset purchasing in the U.S., and a shift toward climate change could favor European stock.

Chinese Stocks

Chinese ADRs have been popular with international investors for some time. On paper, a wealth of flourishing tech firms in the world’s second-biggest economy looks promising, especially because many Chinese stocks are looking very cheap.

However, there are considerable risks with Chinese stocks at the moment. Tencent and Alibaba have come under pressure from the Chinese government in recent months. Other stocks, like the massive ridesharing app Didi, are facing monopoly crackdowns. 

U.K. Stocks

After years of underperformance, many U.S. fund managers are paying attention to U.K. stocks once more. 

Indeed, more fund managers are overweight with U.K. equities rather than being underweight. Brexit is slowly being worked out, and the vaccine rollout means the economy is recovering strongly. 

Other Markets

For many investors, Europe is too stagnant, while China is too risky. Several other markets are at least worthy of consideration. Australian, New Zealand, and South African stocks have an impressive long-term track record to rival U.S. stocks. 

While the lockdowns mentioned above in Australia and New Zealand will give investors some pause, they might also provide investors with a chance to pick up some bargains.

Conclusion

While the S&P500 has overperformed the MSCI’s Europe, Australasia, and the Far East (EAFE) index by 13.7% to 5.4% over the last decade, international stocks have a place in a diverse portfolio. 

However, I would still keep the majority of my capital in the U.S. market for one simple reason: If the U.S. markets fail, so too will the rest of the world. 

South African, Australian, and New Zealand ETFs and indices could prove to be attractive under the right conditions, but investors considering Chinese stocks should be cautious. Recent drops in Chinese equities might grab the interest of bargain hunters, but for now, China looks very risky.

Alpesh Patel OBE

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