Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Ryan Detrick, CMT, Senior Market Strategist, LPL Financial
Among developed markets, we maintain our preference for US equities over international, but the bout of strong performance for the MSCI EAFE Index relative to the S&P 500 Index in late May through early June and the latest weakness in the US dollar are noteworthy. We share our latest thoughts on international equities and reiterate our positive emerging markets view.
We have five reasons for our continued cautious tactical outlook toward developed international equities, most of which are composed of European stocks.
Weaker economic outlook. We expect economies in Europe to contract more than the United States or Japan in 2020 due to the pandemic, consistent with Bloomberg’s consensus forecasts. Although Europe has generally done as well or better than the United States in containing the virus, the economic impact of the lockdowns appears to be greater there, and its stimulus jolt has lagged that of the United States and Japan. Bloomberg’s consensus estimate for Eurozone gross domestic product (GDP) contraction in 2020 is 8%, down from growth of 1.3% at the start of March. US GDP forecasts have fallen a bit less during this time—from 1.8% to -5.7%.
We see several potential paths for upside to international developed equities:
China has led the way out of the global crisis in terms of containing the virus and reopening its economy, which in theory would position emerging market (EM) equities for strong performance. But that has not been the case so far as emerging market stocks, represented by the MSCI EM Index, have under performed the S&P 500 in 2020 by 7 percentage points after lagging significantly over the past decade. We still like the potential for EM based on a stronger economic growth outlook, a smaller expected earnings decline, and, as with developed international, the potential for a weaker dollar, but we understand investor skepticism and would suggest keeping EM allocations relatively modest.
We favor Asia over Latin America due to a stronger growth outlook, more attractive sector positioning, and less dependence on commodity exports. We also recommend active EM investing over passive to enhance opportunities to find companies with strong corporate governance practices and capitalize on dispersion across the asset class.
Our primary concerns besides the relative performance struggles in recent years are: 1) increasing US-China tensions, 2) emerging market’s difficulty converting economic growth into profits and shareholder value, 3)
political instability in several countries, and 4) Brazil’s inability to contain COVID-19.
We find the opportunities in the US market more attractive than developed international when we look out over the next 12 to 18 months. To get more interested in shifting equities from the United States to developed
international markets, we would like to see improved relative performance, more evidence of a durable global economic recovery, and increased investor demand for value stocks. For investors looking for more international diversification, we would suggest EM or possibly Japan. For long-term investors, we remain comfortable with meaningful allocations to developed international equities.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P 500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI EAFE Index: The Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australia and the Far East.
All index data from FactSet.
Please read the full Outlook 2020: Bringing Markets into Focus publication for additional description and disclosure.
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