Many investors remainfixated on what’s happening in the United States, andparticularly on what the Federal Reserve (Fed) will do, but they shouldn’t lose sight of what’s happening abroad.
In fact, while last week provided little news about the US economy and much speculation about the timing of Fed tapering, it did give us more evidence that both the European and Chinese economies appear to be stabilizing.
As I write inmy new weekly commentary, this came in the form of a slew of better-than-expected data from those markets – including a big jump inthe UK services sector, a significantimprovement in German manufacturingand asurprisingly strong Chinese industrial production report.
This international data is a positive for the global economy. Together, the European Union and China represent more than one-third ofglobal domestic product (GDP), meaning they make up a significant part of the global economy and are critical to improving global growth. In other words, their stabilizing economies should help support global growth.
This marks somewhat of a change from the last few years, when international events were often the source of volatility. How can investors play these developments? As I’ve mentioned before, there aretwo main actionable implications:
Consider overweighting large and mega-cap US companies. Better global growth should provide a tailwind for large US exporters . Such stocks are accessible through funds like the iShares Global 100 ETF (IOO).
Consider having someinternational allocation. While economic growth and market returns are not always correlated, to the extent that investors have low expectations for Europe and China, better-than-expected local growth will help support these markets.
In addition, while we are likely to continue to see more volatility abroad, international markets mostly look cheap compared to US stocks and potentially offer some long-term value. Today, based on price-to-book values, other developed markets trade at a 20% discount to the United States, while emerging markets trade at more than a 40% discount.
In addition, sentiment toward international stocks might also finally be turning, at least toward European equities. Look for more from me on Europe in an upcoming post.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to The Blog. You can find more of his postshere.
Source: Bloomberg
The author is long IOO
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