Political risks are rising around the world, but we think savvy investors can benefit by looking beyond the worries and adding international equity investments as a portion of their well-diversified portfolios.
Today’s headlines range from quite severe – such as North Korea’s belligerence, terrorist attacks and Middle East military conflicts – to modestly disruptive, including European elections and Brexit (the British exit from the European Union). That long list of concerns may make it difficult to see the signs of better global economic growth and brighter prospects in many countries.
After several disappointing years, world economic growth is accelerating:
Since the end of the financial crisis in 2009, global growth occasionally started to accelerate but then faltered. This time, however, recent indicators have continued to improve, a bright sign for future economic growth.
Between 2000 and 2014, international developed-market stocks and U.S. large-cap stocks tracked each other fairly closely, as the chart shows. But in four of the past five years, international stocks lagged and fell behind. Performance leadership has rotated in the past, and international equities outperformed following past times when they’ve lagged. That rotation may have started in the first quarter of 2017, when returns on international developed-market stocks were 7.2%, exceeding the 6.1% return on the S&P 500.
International Stocks Outperformed U.S. Stocks in the First Quarter of 2017
In addition to the first quarter’s better performance, we think international developed-market stocks continue to look more attractive than U.S. large-cap stocks due to their:
These better fundamentals also support our expectations for higher long-term rates of return on international equity investments. As a result, we recommend adding international equity investments if appropriate.
We think the opportunities are more attractive in developed markets than emerging-market equity investments but recommend owning both. Keep in mind, there are special risks inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
Near-term forecasts tend to be wrong, and the future rarely looks like the recent past. That’s especially important when comparing Europe and the U.S., since Europe recovered from the Great Recession much more slowly than the U.S. Some investors may not be considering attractive global opportunities due to Europe’s very prolonged, halting recovery; slow Japanese growth; and recent political headlines.
Adding international equity investments to your portfolio can help you stay prepared for a wide variety of possibilities. And they can increase the chances of positive returns over time because they don’t always move in lockstep with U.S. investments. For a clearer view of the future, keep a long-term perspective – longer-term trends can be easier to spot than short-term moves. And broaden your investment horizon by adding international equity investments that are appropriate for your goals and look well-positioned to benefit from an improving world.
Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.