If you’re a long-term investor and don’t own foreign stocks in your portfolio, now might be the time to add one.
“International equities are set very well,” said Ross Mayfield, investment strategy analyst at Baird Private Wealth Management. [allocated] For U.S. equities, we encourage you to reconsider why and whether a more diversified approach is appropriate. “
So far this year, the MSCI EAFE Index, which tracks the performance of foreign equities in developed markets, is off to a good start. The index returns about 6.6% compared to his 1.8% return on the S&P 500 index. This is a continuation of a relatively strong 2022 in which U.S. stocks fell 18% while foreign stocks fell 14.5%.
Here’s why experts say it’s worth keeping some international names for this year and beyond.
Why international stocks are doing so well these days
Investment experts point to several factors that have boosted the recent performance of international stocks.
1. USD deceleration
As the dollar is the dominant currency in international commerce, its strength generally coincides with difficult economic conditions abroad. A strong dollar robs US investors of the returns they receive from foreign investments. Because the profits made by these companies in local currency are converted into lesser dollars.
That’s been the story for most of 2022, as the dollar strengthened against the FX basket, peaking in late September. However, the dollar has depreciated since then amid uncertainty in the US economy and rising interest rates.
“The dollar has risen at historic rates in early 2022,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments. Stated.
2. A warmer than expected winter
Russia’s invasion of Ukraine early last year made international market watchers fear the worst. Not only is the geopolitical situation likely to wreak havoc in the region, analysts say, but a shortage of Russian oil and gas exports could leave the continent with less energy to warm homes during the harsh winter. It can cause a crisis.
This winter isn’t over yet, but so far it’s been warmer than expected, easing some of the pressure on Europe’s energy infrastructure.
Liz Young, Head of Investment Strategy at SoFi, said: “It wasn’t as bad as we expected. The Armageddon situation we feared no longer had to set a price.”
3. Favorable stock composition
U.S. equities have enjoyed a long period of outperformance, which has overvalued certain segments of the U.S. market, says Young. “International reputation was low. We had little to lose,” she says. “They didn’t experience the same bubble in the aftermath of Covid.”
Among US stocks, the biggest losers in the current recession have been the market’s most growth-oriented stocks, such as those in the technology and consumer goods sectors.
“The sector mix of international equities is more in line with the economies we’ve seen,” says Mayfield. “I’m a little more defensive. A lot of what has worked out for me lately.”
Why it’s still worth owning foreign stocks
It’s not the first time foreign stocks have led U.S. stocks.
“International equities outperformed U.S. equities in the early 2000s, a lost decade for U.S. equities following the dot-com bubble,” says Mayfield. “These tend to be longer, sweeping cycles.”
It’s too early to say the market is at the beginning of another long cycle of international outperformance, but many of the factors that contributed to foreign stocks’ recent outperformance are still in place, says Young. increase.
And emerging markets—foreign stocks that are generally considered riskier but offer more promising growth prospects—could be the biggest beneficiaries.
But just because analysts think international stocks are well-positioned isn’t enough reason to buy. Rather, it makes sense to keep an allocation to foreign stocks as they provide valuable diversification to the portfolio.
If U.S. stocks are bogged down, international stocks can give a stock portfolio a lift. say.
“It’s hard to justify a position in an underperforming asset class,” says Mayfield. “But diversification always has its advantages.”
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