International Outlook

Source: Bloomberg, 12/31/2019.

International stocks performed well in 2019 but still trailed U.S. stocks amid trade and other geopolitical uncertainties, a slump in European manufacturing and a slowdown in China. Challenges remain, but there are signs global manufacturing may be stabilizing. We expect a modest re-acceleration in global growth. Together with depressed valuations and a likely softening U.S. dollar, this could position international investments to outperform in 2020.

Manufacturing activity is recovering – Forward-looking business surveys have shown signs of bottoming in economic activity in emerging and developed markets and are consistent with a still-soft but improving demand environment. At the same time, activity in the services sectors of most major economies remains relatively robust, and central bank policies are likely to stay accommodative until growth or inflation picks up.

Valuations reflect pessimism – Even with last year’s rally, international developed stocks are priced at a 20% discount to U.S. stocks, with emerging-market stocks at a 30% discount.* While valuations alone don’t necessarily translate to better short-term results, they have historically been a good predictor of long-term returns. Although past performance is not an indicator of what will happen in the future, we believe higher dividend yields and better valuations support the possibility of above-average long-term returns for international equities and position them to outperform U.S. large-cap stocks over time.

Currency less of a headwind – In six of the past seven years, the rising dollar reduced returns for international developed stocks by an average of about 3% per year when compared with returns in local currencies. We expect the dollar to flatten or fall as global growth stabilizes and potentially rebounds, increasing the chances of improved returns for U.S. investors.

Action for investors

We recommend adding inter-national equity investments as appropriate to take advantage of the likely re-acceleration in global growth. In contrast, the very low rates in the rest of the world keep us cautious about international fixed income, and we recommend reducing inter-national bond investments.

Important Information:

* Source: Forward price-to-earnings ratio, MSCI EAFE and MSCI Emerging Market relative to S&P 500.

Equity investing 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.

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