Is it Time for Small-Cap Stocks Overseas to Shine?

As global markets increasingly ponder how long US economic growth can continue, Franklin Equity Group’s Ed Lugo says he’s looking for potential investment opportunities outside the United States. He explains why he sees opportunities in Europe and Asia, despite concerns about Brexit negotiations and a slowing Chinese economy.

US Economic Growth Faces Headwinds

The US economy is now entering its 10th year of economic expansion. The probability of continued economic expansion over the next five years, in our view, is pretty low.

There are several reasons why we think this is the case. Tariffs and rising interest rates may in time slow down the US economy. Although rates might flatten out a bit in the short term, the United States is at full employment and there’s upward pressure on wages, which will likely cause inflation and push rates up in the longer term.

Higher rates have significant implications for US stock prices, in our assessment. For one, the present value of future US corporate cash flows will be discounted at a higher rate. This would suggest to us that stock prices will likely need to come down for those companies where earnings growth isn’t sufficiently fast.

In our view, US small-cap stocks are currently among the most expensive in the world, especially in the technology and health care sectors. With valuations looking expensive to us in the United States amid rising interest rates, we are finding more compelling opportunities in Europe and Asia outside of Japan.

Political Uncertainty Weighs on European Stocks

Despite continued political uncertainty related to Brexit and the growing influence of populism in Europe, we believe select European small-cap equities look attractive if you take a longer-term view.