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Should I Invest in International Stocks in 2020?

Should I invest in international stocks in 2020? This is a common question on investor’s minds after U. S. stocks fared better than international stocks in 2019. 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 you invest in international stocks in 2020?

Although global stock markets started 2019 on a cautious note after the drubbing in the fourth quarter of 2018, investors had a lot to cheer by year-end.

Every major type of investment or asset class fared well last year.

U. S. stocks led the way. The MSCI USA Index designed to measure the performance of the large and mid-cap segments of the U. S. market rose 30.9%.

Developed international markets and emerging international markets made good gains. Yet, they were unable to outperform U. S. stocks.

Developed market stocks as measured by the MSCI EAFE Index gained 22.0% in U. S. dollar terms last year.

Emerging market stocks as measured by the MSCI Emerging Markets Index gained 18.4% in U. S. dollar terms.

Should I Invest in International Stocks in 2020: Valuation Perspective

The underperformance of international stocks vis-a-vis U. S. stocks in 2019 has enhanced their appeal from a valuation perspective.

According to MSCI, stocks in the MSCI EAFE Index and MSCI Emerging Markets Index trade at a forward price-to-earnings ratio of 14.7 and 12.8, respectively.

In comparison, stocks in the MSCI USA Index trade at a forward P/E ratio of 18.6.

Should I Invest in International Stocks in 2020: Growth Perspective

Prior to the coronavirus breakout, the World Bank forecasted global economic growth to edge up to 2.5% in 2020 from 2.4% in 2019 largely from an uptick in growth in emerging economies. Growth in the first quarter is expected to be significantly impacted by the coronavirus. Economists believe 2020 growth targets will still be met as the global economy goes through a V-shaped recovery after the virus impact subsides.

Should I Invest in International Stocks-Growth Perspective

The world economy is expected to grow 2.5% by in 2020. Manufacturing activity in advanced economies is expected to remain weak and pressure growth. Emerging economies are forecasted to contribute to global growth as some of them recover from economic stress.

Growth in advanced economies is expected to moderate to 1.4% in 2020 from 1.6% in 2019 due to continued weakness in manufacturing.

The bank expects the emerging markets and developing economies to grow by 4.1% in 2020, up from 3.5% in 2019 as a small number of relatively large emerging economies buck the broad deceleration in exports and weakness in investment.

Benefiting from higher growth, companies in emerging markets are forecasted to grow their earnings at a faster clip than those elsewhere in 2020. According to Refinitiv, earnings for companies in emerging markets are estimated to grow 14.6% compared to 8.4% for companies in developed markets and 7.8% for companies in the U. S.

Should I Invest in International Funds in 2020: Currency Conversion Perspective

According to Federal Reserve Economic Data, the trade-weighted dollar index lost 1.2% versus advanced country currencies and 0.3% versus emerging market currencies in 2019.

The European Central Bank (ECB) and the Bank of Japan (BOJ) continued to maintain their highly accommodative monetary policies in 2019, keeping their benchmark short-term interest rates unchanged through 2019 at 0% and -0.1%, respectively. The ECB also restarted its quantitative easing program.

Perceiving rising threats to continued economic growth, the Federal Reserve switched to an accommodative monetary policy in 2019 from tightening in 2018. The U. S. central bank reduced its benchmark short-term interest rates three times in 2019, lowering interest rates by a total of 0.75%.

Inflation in the Eurozone, Japan, and the U. S. is running below the targets set by the respective central banks. The ECB, BOJ, and the U. S. Federal Reserve are trying to get inflation to rise to their target levels. As such, their monetary policies are aligned, favoring lower interest rates.

The CME Group Euro and Yen currency futures quotes show currency traders expect the Euro and Yen to decline 23% and 2%, respectively vis-à-vis the dollar in 2020.

Should I Invest in International Stocks in 2020: Bottom Line

Developed as well as emerging market stocks have lagged U. S. stocks over the past 5- and 10-year timespans.

Over the past 5 years, MSCI USA Index is up a cumulative 68% compared to 32% and 31% for the MSCI EAFE Developed Market Index and the MSCI Emerging Markets Index, respectively.

Likewise, the MSCI USA Index is up 235% over the past 10-years while the MSCI EAFE Index and the MSCI Emerging Markets Index are up 71% and 44%, respectively.

International stocks have outperformed U. S. stocks in only two of the past 10 years. After this extended stretch of underperformance, expectations for international stocks are low and they are more attractively priced compared to U. S. stocks.

Attractive valuation supports the possibility of international stocks delivering above-average long-term returns and positions them to outperform U. S. stocks over time.

However, superior valuation metrics alone do not necessarily translate into superior short-term results.

So, what will it take for international stocks to outperform U. S. stocks in 2020?

International stocks tend to be more sensitive to global growth than U. S. stocks.

If interest rate policies of foreign central banks such as the ECB and BOJ bear fruit and accelerate growth abroad in 2020, international stocks should fare better than U. S. stocks.

So, should you invest in international stocks in 2020?

The answer is Yes.

Now is not the time to give up on international investing. If anything, now is the time to increase allocation to international stocks and international funds.

International stocks are due to provide superior returns compared to U. S. stocks. Whether 2020 turns out to be such a year depends on whether global growth accelerates this year.

 

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