Over the past decade, there wasn’t much reason or reward for buying stocks in Europe and Asia. The strong US economy drove impressive market gains, while other nations lagged. The S&P 500 returned 11.7% annualized over the past 10 years versus 2.26% for the MSCI EAFE Index, which tracks foreign developed markets, and just 0.7% for the MSCI Emerging Markets Index.*
Now things are changing for a variety of reasons, and foreign stock markets could outpace US markets in the coming years, analysts say. Among the reasons: Some foreign countries are recovering more quickly from the pandemic-caused recession than the US is…and there are more bargains overseas in the wake of the record-setting prices that US stocks achieved as they snapped back from the pandemic plunge.
Rob Arnott’s Research Affiliates, which develops predictive models of stock market returns, says US large-cap stocks will post a 0.4% annualized return over the next decade…US small-caps, 2.3%…foreign developed-market stocks, 5.1%…and emerging-market stocks, 7.2%.
Bottom Line Personal asked stock-fund experts Janet M. Brown and Neena Mishra, CFA, why foreign stocks provide big opportunities now and which are the best mutual funds and exchange-traded funds (ETFs) to take advantage of those opportunities.
Bargain prices overseas. Based on price-to-earnings ratios (P/Es), a popular measure of valuation, stocks in foreign developed countries are 30% cheaper than the S&P 500…and emerging markets, 35% cheaper.
Faster economic rebounds. Despite setbacks, many European and Asian countries are recovering more quickly from the pandemic than the US is, allowing their economies to reopen more fully and minimize long-term damage. Examples: Taiwan’s economy is expected to show positive growth for the full year in 2020…and France’s and Germany’s substantial use of government payments to keep workers on business payrolls has kept unemployment and corporate bankruptcy rates much lower than in the US.
Foreign-currency boost. From March 20 through September 15 this year, the dollar sank 10% against a basket of major foreign currencies, including the euro and Japanese yen. Amid enormous US government stimulus spending and historically low interest rates, analysts expect the weakness to persist, which makes foreign stocks even more attractive to US investors. Reason: Foreign-stock gains are increased when they are converted back into weaker US dollars.
Unique growth opportunities. E-commerce and other Internet-related stocks in developing countries are particularly attractive because of large populations of young, tech-savvy consumers.
How to take advantage of the opportunity: It can be complicated for US investors to research and purchase individual foreign stocks. Here are Mishra’s favorite foreign-stock ETFs and Brown’s favorite foreign-stock mutual funds now…
Vanguard Total International Stock ETF (VXUS) is among the most widely diversified foreign-stock ETFs. The fund invests in nearly 7,400 stocks in both developed and developing markets around the world. The annual expense ratio is just 0.08%. Performance since 2011 inception: 3.9%.
SPDR S&P International Dividend ETF (DWX). Patient investors looking for income in addition to capital appreciation should consider this fund, which holds about 100 of the highest-yielding foreign stocks of companies with stable balance sheets from nations including Australia, Canada, France, Germany and Japan. The fund, which dropped 10.6% this year, can be very volatile because it focuses on slow-growing companies whose stocks have done relatively poorly in the global recession, such as banks and commercial real estate firms. Upside: The fund’s portfolio is extremely undervalued—about 40% cheaper than the S&P 500 based on valuations—and its holdings should do very well when the global economy recovers and global interest rates rise. Recent yield: 3.69%. Performance: 1.25%.
iShares MSCI Eurozone ETF (EZU) holds about 250 blue-chip stocks from the 10 largest countries that use the euro, such as France, Germany and the Netherlands. These stocks will benefit from the recent 750-billion-euro stimulus recovery plan launched by the European Central Bank. Valuations of the fund’s portfolio are about 20% lower than the S&P 500 Index. The fund excludes stocks in the UK, which continues to face great economic uncertainty since it left the European Union at the beginning of 2020. Performance: 4.5%.
EMQQ Emerging Markets Internet & Ecommerce ETF (EMQQ) provides exposure to about 85 fast-growing tech stocks in markets that are difficult for US investors to access, such as China, India, Indonesia and Turkey. The fund is nearly twice as volatile as the S&P 500 but has soared 52% this year, benefiting from stay-at-home trends and increased Internet usage among the burgeoning middle class in developing nations. Performance since its 2014 inception: 13.5%.
iShares MSCI Taiwan ETF (EWT) is a bet on a single country. Taiwan is primed for one of the strongest and fastest recoveries of any nation over the next several years. Reason: It developed a strong and effective disease-control system after its bitter experience with the 2002–2003 SARS epidemic. The system was so effective that the country never had to lock down its economy. The ETF holds 90 stocks, including many world-class biotech firms and electronics manufacturers. Performance: 8.4%.
Neena Mishra, CFA, is ETF research director at Zacks Investment Research, Chicago. Zacks.com
Vanguard International Growth (VWIGX) jumped 31% this year thanks to an emphasis on fast-growing large businesses in the technology and health-care sectors. The fund recently held about 120 stocks, including Dutch semiconductor giant ASML and M3, a Japan-based provider of medical-related services to doctors over the Internet. Performance: 11.2%, which ranks in the top 5% of its category over the past 10 years.
Fidelity Emerging Markets (FEMKX) recently had shares in around 80 large-cap stocks, many of which are in China and South Korea, whose economies are recovering more quickly than the US economy. The fund was up about 13% this year. It looks for companies with strong, consistent earnings growth and solid balance sheets, which help reduce volatility for the fund. Top holdings include e-commerce giant Alibaba and Samsung Electronics. Performance: 6.3%, which ranks in the top 2% of its category.
Artisan Global Opportunities (ARTRX). For investors who are uncertain about what mix of US and foreign stocks is best at any given time, this mutual fund makes the decision for you. It recently held about 53% of its assets in US stocks and about 43% overseas, and it adjusts the allocation depending on market conditions. The fund, up 25% this year, looks for high-quality companies with recognizable brand names and dominant market shares, then waits to buy until they are trading at steep discounts. Top holdings in the portfolio of about 45 stocks include Genmab, which is a Danish cancer drug developer, and Hong Kong–based Techtronic Industries, which manufactures Milwaukee and Ryobi power tools. Performance: 15.5%, which ranks in the top 2% of the fund’s category.
Janet M. Brown is president of the FundX Investment Group and editor of the NoLoad FundX newsletter. Both are headquartered in San Francisco. FundX.com
*All performance figures are annualized returns through September 15, 2020 for 10 years unless otherwise noted.