American investors seek profit in foreign stocks

Jan 16 (Reuters) – Some US investors have headed to overseas markets for higher equity returns in the coming months, believing that European and other international stock indices have better valuations after a long period of dominance by US bourses.

Wall Street does not trade on Monday due to the celebration of Martin Luther King Day.

At the beginning of the year, US stock quotes recovered after a difficult 2022, but still lag behind foreign peers. The European STOXX 600 has jumped about 17% since the end of the third quarter compared to the S&P 500’s 11% gain. The MSCI index, which reflects the world’s major stock exchanges other than the US, has risen over this time by more than 20%.

European stock markets benefited as investors said a warm winter helped the region avoid an energy crisis. This was facilitated by the decline in commodity prices, as well as the opening of the Chinese economy and the weakening of the dollar; some expect continued growth.

“We now have more money looking for better opportunities outside of the US, which hasn’t been the case in the last few years,” said Federated Hermes’ Martin Schultz.

Federated Hermes said this week that it is moving from a “moderately bearish” outlook for equities to a “moderately positive” outlook, driven entirely by rising international markets.

American stocks have long dominated foreign counterparts. The S&P 500 has soared more than 460% from the financial crisis lows of March 2009 to last year, while the European STOXX index has gained 170% in the meantime.

This period largely coincided with ultra-low interest rates, which favored US stock indices, which are much more tech stocks than European stocks. The technology sector makes up 26% of the S&P 500, while in the STOXX 600, which is much more focused on financial and industrial assets, it is only about 7%.

However, over the past year, the situation has rapidly leveled off, as the world’s central banks raised interest rates to fight inflation. Higher-priced loans tend to put significant pressure on valuations of tech stocks and other growth stocks, while banks and undervalued stocks with heavy weight in European indices potentially win.

“A rare and temporary circumstance that has favored US exchanges is unconventional monetary policy, and it has come to an end,” said Alessio de Longis of Invesco Investment Solutions.

The firm shifted broadly into international equities last month, adding to its overall exposure in stock markets, de Longis said.

Jeffrey Gundlach of DoubleLine Capital and BofA Global Research suggests that in 2023 global equities will beat their US peers.

Even despite the recent strength, stocks from European STOXX are still trading at a significant discount: according to Refinitiv Datastream, the forward price-to-earnings ratio (P/E) is 12, while for the S&P 500 it is about 17. This gap in valuation is close to its all-time high, more than double the historical average.

“All indicators that can be traced in terms of valuation show that international stocks have historically been cheap compared to US stocks,” said Brent Schutte of Northwestern Mutual Wealth Management Company.

Another push for international stock indices was the recent weakening of the dollar, which has fallen about 9% since the end of the third quarter. A depreciating dollar is good for US investors converting foreign profits back into US currency, and some investors believe the greenback could continue to fall as the Fed nears the end of monetary policy tightening.

Some investors believe US equities will soon regain their edge over other regions. Since 2012, U.S. stocks have typically outperformed other world stocks, averaging a 1.7% difference over a typical 50-day period, according to DataTrek Research’s Nicholas Colas.

“As much as we feel about the merits of lower-valued non-US stock indexes, their recent superiority suggests that investors should be careful chasing the current rally,” Colas said in a note last week.

Investors say the anticipated global recession could be one factor driving investors back into US equities, seen by many as a safe haven in times of economic uncertainty.

Buying international papers could complement opportunities in the domestic market, said Mona Mahajan of Edward Jones.

“US markets haven’t recovered that much yet, so I think there’s still a fundamental opportunity in the US to catch up a bit,” Mahajan said.

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(Lewis Krauskopf, translated by Tomasz Kanik)

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