International developed-market stocks declined in 2018 as global growth stumbled and investors became pessimistic. We don’t believe a global recession is on the horizon since economic indicators have started to stabilize at low levels. However, they have not yet turned positive, and still-low valuations suggest investors remain overly cautious. While trade frictions and political uncertainty will likely cause ongoing volatility, we think international emerging- and developed-market equities are well-positioned to outperform.
Supportive policies – Major central banks in the rest of the world have extended and expanded their monetary policies to combat faltering economic growth. In addition, higher political uncertainty has led many governments to spend more, and expansionary fiscal policies should increase growth prospects. Although we think political uncertainty may trigger more short-term market volatility, policymaker support is sufficient to keep the world economy expanding at a slow but positive pace.
Signs of stabilization – Although European data remain weak, China’s stimulus policies are starting to gain traction. China’s March PMI showed a return to expansion after several months of mild contraction, and the impacts of its tax cuts and other policies should produce modestly faster growth in the world’s second-largest economy. In addition, we expect a resolution of the U.S.-China trade dispute could be a catalyst for improving trade and growth globally.
Diminishing dollar strength – The chart shows positive returns for international developed-market equities in their own currencies in eight of the past 10 years. But in four of the past five years, the rising dollar reduced returns to U.S. investors. We think the dollar is more likely to stay flat or decline as the growth outlook for the rest of the world improves.
To take advantage of improving prospects for global economic growth, we recommend adding broad-based developed- and emerging-market equity investments, where appropriate. We think their below-average valuations reflect overly pessimistic expectations. In contrast, very low interest rates in the rest of the world have kept us cautious about international fixed income, and we recommend reducing international bond investments.
Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.
Special risks are inherent to international and emerging-market investing, including those related to currency fluctuations and foreign political and economic events.