4 Reasons You Should Still Invest Abroad
2016 has not been a stellar year for many markets, outside of gold. Indeed, a standard, plain vanilla, domestically oriented 60/40 blend of U.S. stocks and Treasury bonds has produced reasonably good returns. This, in turn, reinforces a nagging question: Is international investing still worth it?
After all, emerging market (EM) equities have trailed for most of the past five years, outperformance by Europe has been episodic, and despite some good years, Japan is once again frustrating investors. Given the risks, why bother?
But don’t be so quick to abandon investing outside the United States. Here are four reasons to consider why you should not throw in the towel on your overseas investments.
The S&P 500 is currently trading at roughly 19.5x trailing earnings, the top quartile of historical observations, according to Bloomberg data. The good news is that this is still below the level associated with most recent market peaks (2008 was an exception). However, while not necessarily indicative of a market top, current levels have historically been associated with lower future returns. Longer-term valuation measures—notably cyclically adjusted earnings (CAPE)—are even more elevated and suggest low- to mid-single digit returns over the next five years. In contrast, most major markets outside the United States are trading at valuations at or below their historical average, as illustrated in the Chart of the Week below:
2. EM is actually outperforming.
Emerging markets have started to recover, with stocks up roughly 6% in local currencies and more than 7% after adjusting for the rebound in EM currencies against the U.S. dollar, according to Bloomberg data. Although these stocks have started to stabilize, valuations still appear inexpensive, particularly on a relative basis. The MSCI EM equity index is trading at roughly 1.35x book value, more than 50% cheaper than the S&P 500, as Bloomberg data shows.
3. International investing is not just about stocks.
While U.S. stocks have led other developed equity markets this year, some of the best performing bond markets have been outside the United States. For example, emerging market debt is up over 10% year-to-date (Bloomberg data). With interest rates in the United States at record lows and rates in other developed markets increasingly in negative territory, investors may want to look beyond traditional markets in search of yield.
4. In a real bear market, U.S. stocks are not necessarily the safest place to hide.
If you’re really worried about a bear market, U.S. equities are still likely to suffer. Yes, given relatively high profitability and the dollar’s safe haven status, U.S. markets could probably hold up better than other stock markets, but not necessarily better than other asset classes. Investment grade bonds, preferred stocks or bank loans offer reasonable returns with arguably less volatility, in my opinion.
The lesson is not to abandon the United States. The domestic stock market still offers investors several desirable characteristics: a stable currency, high profit margins and world class companies. That said, it also comes with a high price tag. For long-term investors, this suggests looking beyond the comforts of home.
Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation Fund and is a regular contributor to The Blog.