Alexander Green’s recommendation in the December issue of the Communiqué has me thinking about international stocks.
In fact, it’s a topic I wrote about for The Oxford Insight back in September.
And the case for investing a significant portion of your portfolio in non-U.S. stocks has only gotten stronger.
International stocks continue to trade close to their low for the year. They’re now down nearly 19% year to date as measured by the iShares MSCI ACWI ex U.S. ETF (Nasdaq: ACWX).
(ACWI stands for All Country World Index.)
Compare that with the S&P 500, which is down about 17% this year.
The bigger drop in international stocks has made them cheap compared with U.S. shares.
According to Yardeni Research, U.S. stocks are trading at 16.2 times forward earnings. That’s pricey compared with the rest of the world’s stocks.
Especially when you consider…
- Global stocks (excluding the U.S.) are trading at just 11.1 times earnings.
- Rich-country stocks (excluding the U.S.) are trading at 11.4 times earnings.
- European stocks are trading at 10.9 times earnings.
- Japanese stocks trade at 12.1 times earnings.
- Emerging market stocks – a huge category, with countries ranging from China to Brazil – trade at just 10.5 times forward earnings.
And while U.S. stocks have outperformed non-U.S. stocks over the last 12 years, that’s not always been the case.
International stocks – including those in both developed and emerging market countries – crushed U.S. stocks in the years between the dot-com bubble and the global financial crisis of 2007-2009.
That five-year stretch was no anomaly either.
According to asset management firm Nuveen, the MSCI EAFE Index, which tracks stocks of wealthy countries, excluding the U.S., has bested the S&P 500 24 of the past 50 calendar years. Emerging market stocks – as measured by the MSCI Emerging Markets Index – have outperformed the S&P 500 in 15 of the last 32 years.
So international stocks beat U.S. stocks about half the time.
And the enormity and diversity of the non-U.S. market is tremendous.
Non-U.S. stocks represent more than $27 trillion in market capitalization, and countries outside the U.S. make up more than three-quarters of the global economy.
The Dollar Has Serious Purchasing Power
Finally, the U.S. dollar hasn’t been this strong in decades.
It trades against most other currencies at multiyear highs. That means you get more for your dollars when you’re shopping for stocks abroad (just like you get more for your money as a tourist in Paris or Tokyo these days).
The bottom line: Not only are non-U.S. stocks an enormous opportunity in terms of market cap, but they beat U.S. stocks roughly half the time. And right now they’re priced at a deep discount relative to U.S. shares.
And yes, U.S. stocks have dominated the world in recent years. But history and economics tell us there will eventually be a change in leadership, with international stocks again outperforming their U.S. counterparts for a stretch.
There’s no way of knowing when that change will happen.
In fact, because U.S. stocks have been relatively expensive for years, it might have occurred this year… were it not for the unexpected war in Ukraine and skyrocketing energy prices in Europe.
But long before any change in leadership occurs, you’ll want to be prepared to benefit from it by including a healthy dose of emerging market and non-U.S. developed market stocks in your portfolio.
Alex’s Gone Fishin’ Portfolio in The Oxford Communiqué recommends a 30% allocation to international stocks. That includes 10% to stocks in emerging markets, like Brazil, Taiwan and South Africa; 10% to European stocks; and 10% to stocks in the Asia-Pacific region, including Japan, Australia, New Zealand and Singapore.
That’s a healthy diversification that can reduce risk in your portfolio and all but guarantee that you’ll have winners in the long run.
And right now, the price is right. If you’d like to gain exposure to these stocks, an easy way is through low-cost mutual funds like those created by Vanguard or exchange-traded funds. Alex has all the details in his national bestseller The Gone Fishin’ Portfolio: Get Wise, Get Wealthy… and Get On With Your Life.