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3 Reasons to Explore International Stocks Now

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3 Reasons to Explore International Stocks Now

International stocks have been outperforming their U.S. counterparts recently, based on a one-year rolling return. Could they be due for a cyclical comeback?

In this graphic from New York Life Investments, we explore why current economic conditions make it more likely that international investments could boost a portfolio’s return. 

1. Diversification Amid an Uncertain Economy

The U.S. economic outlook is uncertain, and this could lead to lower returns in U.S. markets.

In fact, investment firms predict that U.S. stocks could see an annualized return of 6.7% over the next 10 years, compared to 9.4% for developed market stocks. This is based on an average of capital market assumptions from six investment firms published at the end of 2022.

Historically, international stocks have generated better returns when U.S. stocks have seen poor long-term performance. As seen in the below table, in the wake of the global financial crisis, international equities’ 10-year returns were 17% higher than U.S. equities on average.

Date
S&P 500
10-yr Rolling Return
MSCI EAFE
10 -yr Rolling Return
Performance Difference
MSCI EAFE - S&P 500
January 200841%65%24%
February 200827%57%30%
March 200820%50%30%
April 200825%57%32%
May 200828%58%30%
June 200813%44%31%
July 200813%38%25%
August 200834%51%17%
September 200815%33%18%
October 2008-12%-4%8%
November 2008-23%-14%9%
December 2008-27%-12%15%
January 2009-36%-20%15%
February 2009-41%-27%14%
March 2009-38%-26%12%
April 2009-35%-20%15%
May 2009-29%-6%24%
June 2009-33%-10%23%
July 2009-26%-5%21%
August 2009-23%0%23%
September 2009-18%3%21%
October 2009-24%-2%22%
November 2009-21%-4%18%
December 2009-24%-10%14%
January 2010-23%-8%15%
February 2010-19%-11%8%
March 2010-22%-10%12%
April 2010-18%-7%12%
May 2010-23%-16%8%
June 2010-29%-20%10%
July 2010-23%-8%15%
August 2010-31%-12%19%
September 2010-21%2%22%
October 2010-17%8%25%
November 2010-10%6%17%
December 2010-5%11%16%
January 2010-6%14%20%
February 20107%27%20%
March 201114%33%18%
April 20119%31%22%
May 20117%32%24%
June 20118%35%28%
July 20117%36%29%
August 20118%27%19%
September 20119%27%18%
October 201118%36%18%
November 20119%24%15%
December 201110%22%13%
January 201216%36%20%
February 201223%43%19%
March 201223%34%12%
April 201230%31%1%
May 201223%14%-9%
June 201238%27%-11%

Source: Yahoo Finance and MSCI, 07/04/2023. The time period shown is the only time when 10-year rolling returns for the S&P 500 Index were less than 50%.

Adding exposure to international investments may help boost return potential when U.S. equities are underperforming on a long-term basis.

2. Valuations are at Historical Lows

International equities are currently trading at 20-year lows relative to U.S. stocks, which could present attractive opportunities.

In fact, the relative P/E ratio for international equities is 30% below the long-term average. 

DateTrailing Price to Earnings Ratio,
MSCI EAFE Relative to S&P 500
June 20230.61
Average, January 2000-June 20230.87

Source: Factset, 06/30/2023.

Importantly, some surveyed asset managers believe these lower valuations will fuel the outperformance of international investments over the next decade.

3. U.S. Dollar Dropping From September 2022 Peak

During six of the last seven periods of a weakening U.S. dollar, international equities have outperformed U.S. stocks.

Period of Weakening USDTotal Gain in MSCI EAFE IndexTotal Gain in S&P 500 IndexPerformance Difference 
MSCI EAFE - S&P 500
Jan 2002-Dec 200439%7%32%
Nov 2005-Mar 200827%6%21%
Feb 2009-Nov 200956%49%7%
May 2010-Apr 201132%25%7%
Dec 2016-Mar 201819%18%1%
Mar 2020-May 202150%63%-13%
Sep 2022-Jun 202328%24%4%

Source: MSCI and Yahoo Finance, 07/04/2023. Periods of a weakening U.S. dollar were calculated using the ICE U.S. Dollar Index.

If the U.S. dollar continues to weaken, history indicates that international investments could deliver higher returns.

Expanding to International Stocks

Current economic conditions signal that now may be a good time for investors to consider international investments.

  • Uncertain economy: Exposure to international equities may help boost returns when long-term U.S. stock performance is lagging.
  • Low valuations: International equities are trading at a discount to U.S. stocks, indicating there could be buying opportunities.
  • Weakening U.S. dollar: In six of the last seven periods when the U.S. dollar was declining, international investments outperformed U.S. stocks.

By owning stocks outside the U.S., investors can take advantage of attractive prices and diversify their portfolio.

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