Should I Invest in International Stocks in 2018?
Sam Subramanian PhD, MBA
Should I Invest in International Stocks in 2018? This is a common question on investor's minds. The investing media is rife with content on overvaluation of U. S. stocks. Warnings of a correction in U. S. stocks abound. Are international stocks attractive compared to U. S. stocks? In this post, I compare the valuation of stocks and prospects for growth in the U. S. versus those in international markets. I also analyze the potential for changes in currency exchange rates impacting international stock returns and answer the question: Should I Invest in International Stocks in 2018?
Investing in international stocks paid off in 2017 after many years of underperformance vis-à-vis U. S. stocks.
Stocks in developed international markets and emerging international markets outperformed U. S. stocks for the first time after 2012.
Developed market stocks as measured by the MSCI EAFE Index gained 25.0% in U. S. dollar terms last year.
In comparison, emerging market stocks as measured by the MSCI Emerging Markets Index gained 37.3% in U. S. dollar terms.
Meanwhile, the MSCI USA Index designed to measure the performance of the large and mid-cap segments of the U. S. market rose 21.9%.
Should I Invest in International Stocks in 2018: Valuation Perspective
Stocks in international markets trade at attractive valuation metrics compared to stocks in the U. S. even after their recent outperformance.
According to MSCI, stocks in the MSCI EAFE Index and MSCI Emerging Markets Index trade at a forward price-to-earnings ratio of 15.0 and 13.0, respectively compared to a forward P/E ratio of 18.9 for stocks in the MSCI USA Index.
Should I Invest in International Stocks in 2018: Growth Perspective
The World Bank forecasts global economic growth to edge up to 3.1% in 2018 from 3.0% in 2017.
The bank, however, expects growth in advanced economies to moderate slightly to 2.2% in 2018 from 2.3% in 2017 as central banks gradually remove their post-crisis accommodative monetary policies and an upturn in investment levels off.
Offsetting this, the bank expects growth in emerging market and developing economies to strengthen to 4.5% in 2018 from 4.3% in 2017 as commodity exporters benefit from firming commodity prices.
Led by stronger growth in emerging international markets and higher commodity prices, the world economy is expected to grow 3.1% in 2018.
Looking at specific countries and regions, lower tax rates in the U. S. in 2018 are expected to stimulate business investment and consumer spending. This, in turn, should help the growth rate tick up to 2.5% in 2018 from 2.3% in 2017.
In Europe, uncertainty over the outcome of Brexit negotiations and the impact of higher inflation on household purchasing power can pose headwinds to growth in 2018.
The year 2018 promises to be a stronger one for the Indian economy. Bucking temporary disruptions caused by the transition to a new nationwide Goods and Services Tax, the Indian economy grew 6.7% in 2017. The Indian economy's growth rate is expected to increase to 7.3% in 2018 as consumption remains strong, exports recover, and investment revives with ongoing policy reforms and infrastructure improvements.
Should I Invest in International Stocks in 2018: Currency Conversion Perspective
In 2017, U. S. investors benefited from owning international stocks as the U. S. dollar weakened against major currencies after setting a 14-year high in late 2016.
The dollar's decline was in large part the result of the Trump administration's reversal of its 2016 election campaign posture that a stronger dollar means a stronger America.
The Trump administration has now voiced its support for a weaker dollar. Treasury Secretary Mnuchin commented at the World Economic Forum that a weak dollar benefits American trade.
Offsetting this support for the U. S. currency to weaken, U. S. interest rates are poised to rise in 2018 while central banks in Europe and Japan continue to support their economies. The increasing interest rate differential between the U. S. and other advanced economies should normally drive the U. S. dollar higher.
As such, the odds of the U. S. dollar continuing its decline against major currencies in 2018 appear low and a modest strengthening could be in the offing.
Should I Invest in International Stocks in 2018: Bottom Line
Stocks in international markets compare favorably to stocks in the U. S. from a valuation perspective.
For the most part, stocks in international markets compare favorably to stocks in the U. S. from a growth perspective too.
From a currency conversion perspective, U. S. investors are unlikely to see a boost to the returns from owning stocks in international markets.
In this milieu, investors with a horizon of over seven years can look to normal-weight their investments in international stocks in 2018.
While international stocks may not be able to buck the decline in U. S. stocks over short timeframes, the superior valuation and growth characteristics of international stocks should help them recover in a shorter time compared to U. S. stocks.
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