Could International Stock Outperformance Continue?

Domestic stocks were strong performers for a decade coming into 2022. However, that all changed as US stocks sold off and international stock performance surged. Developed markets, in particular, saw strong performance thanks to a combination of improved economic conditions and the rise of technology stocks. 

Emerging markets also benefited from improved macroeconomic conditions, particularly in countries like China and India. But will international stock outperformance continue?

If history is any guide, it is completely reasonable to believe that international stock outperformance may continue for a while longer. Especially as we consider the positive catalysts of China reopening and fiscal stimulus programs in Europe.  

Historical market trends and what they mean for the future

The historical record certainly supports the idea that international stock performance will continue to outperform US stock performance. Take, for example, the chart of 5-year monthly returns below which shows that since 1975 outperformance cycles between domestic and international stocks have lasted 8 years on average. 

If the current moment in time looks anything like these historical periods, then international stock outperformance could potentially be in the early stages. 

Is it a good time to buy international stocks?

It is always important to consider the impact of the macroeconomic environment when considering investments in international stocks. With global markets experiencing unprecedented volatility, it is essential for investors to be aware of changing economic conditions and their implications for investment decisions. In particular, understanding how currency exchange rates could affect an asset’s performance and what steps can be taken to mitigate or exploit these changes is important.

That said, we believe that the magnitude of US market dominance over the last decade could make international outperformance even more substantial. As the chart below indicates, US market dominance is at its most stretched level in over 120 years. If we think about markets like rubber bands that stretch but eventually revert to the mean, then the next cycle of international stock outperformance, whether or not it occurs now or at some later time, is primed to be wider than normal but also potentially more durable than in past cycles.

This is even more likely because until recently so many investors had written off international equities as perennial laggards. Today, we are seeing that sentiment shift and investor dollars are rotating away from US stocks toward international stocks. In fact, asset allocators are now the most underweight to US stocks since October 2005. 

How do value stocks perform?

Investors are also increasingly allocating to value stocks, as value’s relative performance has improved over the past year. Value stocks are defined as companies whose stock is considered to be undervalued relative to its fundamentals – meaning it has a lower price-to-earnings (P/E) ratio than that of the market overall. 

Value style leadership has historically been associated with international equity outperformance. While not guaranteed to happen again, it should certainly be considered by investors as they make asset allocation decisions moving forward, as value stocks have the potential to outperform growth.

Talk to an Avidian Wealth Solutions advisor to determine whether value stocks are complimentary to your investment risk mitigation strategy.

Weekly Global Asset Class Performance

The below report provides a detailed analysis of the current market environment and looks at how various asset classes are performing throughout the world. Before making any spontaneous decisions to your asset allocation based on the numbers reported, talk to your advisor about your particular situation and objectives to determine the best strategies for you given the current market and your long-term ambitions.

Should I invest in international stock? Get professional investment management advice with Avidian Wealth Solutions.

If you need help determining whether you have enough international stock exposure in your managed investment account or perhaps too much, contact one of our advisors at Avidian Wealth Solutions. 

Our team of experienced financial advisors can help you assess your financial plan and objectives and develop tailored strategies to help you meet your long-term objectives. From determining the right asset allocation mix and exploring alternative investment vehicles to positioning your portfolio for the market environment ahead and selecting the best investments for retirement, we’re here to provide guidance every step of the way.

Schedule a conversation with us today to learn more about partnering with our high-net-worth investment firm.

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