International stocks have lagged U.S. markets for the last decade. But with the valuation gap wider than ever, that appears to be changing.
Stocks are on an incredible upside tear, with the S&P 500 up 17.9% since November 1, while the Nasdaq has gained 20.9%.
But if you think this is as good as it can get, better think again. Take a look at how well markets outside the U.S. are performing right now.
Every major global stock market is up. In fact, many overseas markets are outperforming America’s by wide margins. For instance, just since the end of October …
- Emerging Markets are up 26.2%
- Brazilian stocks are up 33.8%
- European stocks have gained 36.8%
- And South Korean shares have jumped 47.1%
Sadly, many stay-at-home American investors could be missing out on the party in international stocks today.
Don’t be Blindsided by Bias
There is a phobia of sorts among U.S. investors called home-country bias. Many Americans quite simply have blinders on to what’s happening in other markets around the world.
And you can’t really blame them.
We are all bombarded constantly by the mainstream media, and especially business TV, about how well the Dow Jones Industrial Average is doing, or what’s happening to Nasdaq tech stocks or the S&P 500 blue chips.
But don’t let yourself be distracted by the home-field advantage of domestic stocks. There is a whole wide world of investment opportunities out there in other markets to choose from.
Plus, many overseas stock markets are not only at cheaper valuation than U.S. stocks today, but are expected to post stronger growth too. Take emerging markets (EM), for example.
EM Stocks on Sale: 39% Cheaper than U.S. stocks
According to Fidelity’s Jurrien Timmer, emerging market stocks trade at valuations that are only 61% of the price-to-earnings ratio of U.S. stocks, which means EM stocks are 39% less expensive than U.S. stocks. That’s the lowest valuation for emerging markets in almost 20 years.
The U.S. dollar plays an important role in emerging markets’ economic and stock market performance. When the dollar is weak, as it has been recently, EMs have historically outperformed. And there are signs the dollar may stay low in 2021.
Another big factor in favor of EMs is where we are right now in the economic cycle.
After most countries suffered from a pandemic-induced recession in 2020, a global recovery is now taking hold in 2021. The combination of faster growth rates in emerging market economies and lower stock valuations could make 2021 a banner year for EM stock performance as worldwide economic growth accelerates.
Pandemic Silver Lining for EM Stocks
The global pandemic is accelerating the adoption of digital technology everywhere, but this revolution is unfolding even faster in emerging countries. And it is delivering a larger boost to economic growth for EMs, according to research from JPMorgan.
Their analysts point out that, “Of the world’s 30 most digitized economies (by digital revenue as a share of GDP), 16 are found among emerging markets, led by China, South Korea, Indonesia and Colombia.”
The truth is, digital revenue is barely growing in developed countries, but is expanding much faster in emerging markets. In fact, digital revenue is growing by 11% per year in emerging markets.
JPMorgan also says that while “digital technologies are lowering the cost of launching and operating business everywhere, this process is fastest where the adoption of digital services is most rapid: emerging markets.”
History Says It’s Time to Buy International Stocks
History may also be on the side of international stocks in 2021 and beyond.
Over the past decade or so, U.S. stocks have easily outperformed international stock markets. But that could be due for a change.
Besides, international stocks, represented by the MSCI All Country World ex-U.S. Index (ACWX), have actually outperformed the S&P 500 for long periods, and by a fairly wide margin.
And we are now overdue for international stocks to regain their performance advantage.
There are many ways to add international and emerging market exposure to your stock portfolio. For instance, there are hundreds of ADRs (American Depositary Receipts) that trade in the U.S. but represent ownership of international companies.
Perhaps the easiest way into international stocks is through regional, or even single-country, exchange traded funds. For example, there’s the iShares MSCI Emerging Markets Index ETF (EEM), or the iShares MSCI EAFE Index ETF (EFA), which represents mainly European, Japanese, Australian and developed Asian markets. Both have been trending upward in recent months.
Bottom line: The valuation gap between U.S. and emerging stock markets has never been this wide. And with the growth prospects of emerging economies rising relative to America’s, this imbalance is enough to make it worth owning international stocks, and especially emerging markets, in 2021 and beyond.