After years of underperformance, international stocks have started off strong in 2015. The economic world is seeming smaller and investing outside of the U.S. can be an integral part of a successful portfolio.
While historical performances are never a guarantee of what may occur in the future, being aware of the current international investing environment in light of past outcomes provides good input for your investing decisions. Here are three reasons we think you should consider investing in international stocks.
Reason #1: Ripe for Outperformance
After a negative return in 2014, many investors were left wondering “why own international stocks”. Particularly after seeing U.S. stocks go up double digits for three straight years. This is why: Since the beginning of the stock market recovery in 2009, U.S. stocks have performed slightly over 17 percent per year, based on the S&P 500 Index. This compares to just below 10 percent per year for international stocks, based upon the MSCI ACWI Ex-US Index. Historically, international stocks have produced returns in line with or greater than U.S. stocks, albeit with increased volatility. If this still holds true, then expectations would be for international stocks to outperform at some point to catch up.
What has caused this inferior return? While the U.S. was finding its way out of the financial crisis, international stocks kept getting hit with one bad situation after another. Whether it was China’s slowing growth, Japan’s deflation issues, or Europe’s ongoing banking/country debt situation, international stocks had a hard time finding room to run before being pulled back down. Most of these issues have already been priced into the market. And, it appears the European Central Bank has implemented strategies to spur economic growth. When our Federal Reserve took the same action in the U.S., it propelled our stock market higher. While there is no certainty that this will happen with European stocks, we are seeing positive signs so far in 2015.
Reason #2: Diversification
Can you guess the number of times in the past 15 years that international stocks have outperformed U.S. stocks? If you guessed half, then you were nearly correct. International stocks have outperformed in eight of those 15 years based upon the performances of the S&P 500 and the MSCI EAFE International Stock Index. Taking the data one step further shows that in four out of the eight years in which international stocks did better, the outperformance was at least nine percent or greater. For reasons noted above, recently U.S. stocks have faired much better, outperforming in four out of the past six years. This has likely lead to many portfolios naturally being overweight to U.S. stocks. Many investors should consider taking profits in the U.S. stocks or mutual funds and re-investing in internationals. “Don’t put all you chips in one economic basket”. Seeking diversification is a good reason for investing in the international stock market. It makes you less dependent on the growth prospects of a single economy. And as demonstrated historically, spreading out the risk tends to reward investors in the long run as it stabilizes overall annual returns.
Reason #3: Currency Hedge
This may be more of a temporary reason to own international stocks. As we have witnessed over the past year, the U.S. Dollar has strengthen against most other currencies around the world. Without getting into too much detail, this basically makes it more difficult for U.S. companies to compete with their foreign counterparts, because foreign goods become cheaper to produce and sell. Therefore, foreign companies have an advantage in this environment. We mention this being temporary as currencies tend to swing from strong to weak based upon various economic factors. At some point, the U.S. Dollar will weaken and give the advantage back to U.S. companies. However, currently the advantage is with companies operating in non-U.S. Dollar countries. This is another factor benefiting international company stock performance over U.S.Summary
Now is a good time to review the international exposure you have in your stock portfolio. You may find that your allocation is out of balance due to the recent dominating performance of U.S. stocks. Taking time to rebalance, or to add international exposure if you have none, may potentially put your portfolio in a better position to realize long-term gain.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.