FA Magazine July/August 2021 - Page 30

THE LONG VIEW
Evan Simonoff

Investors Look Abroad For Value

Don ’ t look now , but many foreign markets are beating America ’ s .

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ARKETS HAVE A WAY OF BEHAVING IN A VERY rude fashion . Last spring , as Covid-19 spread from the Northeast across America in April and May , equity prices were staging a powerful rally .
By late June of this year , the S & P 500 had soared nearly a stunning 94 % from its lows on March 24 , 2020 . It wasn ’ t just America . As horrifying as the news from Brazil and India was in this year ’ s second quarter , their stock markets were surging .
One advantage that foreign markets currently enjoy is that the inflation fears present in the United States are largely absent abroad , leaving other countries ’ central banks under less pressure to raise interest rates . It also means their equity prices could be less vulnerable .
With the American economy roaring back to life as summer began , there weren ’ t many things running hotter — but the U . S . stock market was still strong . America , the United Kingdom and certain other small nations ranging from Israel to Bhutan were enjoying impressive vaccination results as they approached herd immunity — and while the rest of the world was playing catch-up .
That probably helped maintain a valuation gap between the U . S . and other foreign markets that remained much wider in late June than it usually is . International stocks are selling at a 24 % discount to their U . S . counterparts , according to Gabriela Santos , executive director and global market strategist at J . P . Morgan Asset Management . Historically , that discount is about 13 %.
North Asian countries like Taiwan , South Korea and China took the lead in the early stages of the global economic recovery last year . Then in the first quarter , the U . S . vaccine rollout caught fire .
After bureaucratic stumbles earlier this year , Europe finally got its act together . It has now vaccinated nearly 50 % of its population , Santos says . That ’ s one reason European stocks outperformed public U . S . companies in the second quarter .
Santos believes European equities still have more runway left . Most of the continent ’ s bourses have a more cyclical tilt — cyclicals , in fact , make up 55 % of the European and Japanese markets while they represent only 33 % of the U . S . market . That makes these stocks relatively more attractive as an early-cycle play .
Many American investors view European economies as socialist and sclerotic . The European Union ’ s bungled rollout of vaccinations only confirms those perceptions .
This viewpoint is understandable , according to Jim McDonald , executive vice president and chief market strategist at Northern Trust Asset Management . But it “ improves the odds ” that European stocks could outperform other markets , most notably the U . S ., for several years .
McDonald himself expects European markets to beat the U . S . for at least the next year — for many of the same reasons Santos does . Many American investors don ’ t realize that European public companies generate 50 % of their revenues outside Europe , he adds . ( The companies are so established in emerging markets because of their colonial histories .)
For a quarter century after the Berlin Wall fell in 1989 , globalization opened new market opportunities for giant multi-nationals . Following Brexit and the election of Donald Trump in 2016 , there was new hostility to open borders and free trade .
Counterintuitive though it might seem , McDonald believes that de-globalization actually means less correlation in investments — and thus investors could get more tangible benefits from diversification than they have come to expect .
It also means investors who allocate
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