There are some things in life you can count on. Unsolicited advice from your parents, for example. Or be a short sock after washing an armful of laundry. And you can also count on my colleague Christine Benz to share long-term stock and bond return forecasts from several highly respected investment firms, including BlackRock, JP Morgan, Morningstar Investment Management, Research Affiliates, Schwab and Vanguard, every January.
Why does she indulge in this annual ritual?
“Long-term return projections can be useful and arguably even mission-critical in a financial planning context,” she says. “Without some expectation of market returns, it’s hard to know how much to save, whether a retirement nest egg is enough, or whether a retirement spending rate is too high. Long-term historical returns could fulfill this role, but at various times, such as early 2000 or early 2022, they could be unrealistic.
What do market pros expect in the next few years after a tough 2022 for stocks and bonds? “Thanks to rising fixed income yields and falling equity valuations, nearly every company in our survey has raised their expectations for stock and bond returns over the next decade,” Benz reports. And every company surveyed expects better returns for international stocks than for US stocks over the next decade. (Read details in Experts Forecast Stock and Bond Returns: 2023 Edition.)
For investors looking to increase their exposure to non-U.S. stocks, here are the best international stock and ETF ideas from Morningstar today.
10 Undervalued International Stocks
These 10 international stocks were taken from the Morningstar Global ex-US Moat Focus Index and appeared undervalued as of January 27, 2023.
- Airbus EADSY
- ING Group ING
- Anheuser-Busch InBev BUD
- Bayerische Motoren Werke BMWYY
- Imperial Marks IMBBY
- WPP WPP
- Yum China YUMC
- BRP DOOO
- HSBC Holdings HSBC
- GSKGSK
For those who don’t shy away from investing in individual stocks, Morningstar’s equity investing strategy works around the world. First, favor companies with sustainable competitive advantages, or economic moats. These companies should be able to fend off the competition and exceed their capital costs for years to come. Then buy those companies when their shares are trading below what they’re worth — in our parlance, below our fair value estimates. (Read more about our approach to equities in Morningstar’s Guide to Equity Investing.) We think undervalued stocks with economic moats make great long-term investments.
The Morningstar Global ex-US Moat Focus Index is a quality-focused subset of the Morningstar Global Markets ex-US Index, a broad index representing 97% of the market capitalization of developed markets (ex-US) and emerging markets. Morningstar ranks wide and narrow moat stocks in the Broad Index by lowest price/fair value to find the 50 cheapest wide and narrow moat stocks. These stocks represent the most compelling values in the world’s moat universe.
Watch: “3 Cheap International Stocks to Buy and Hold”
The 7 Best International Equity ETFs
For investors who prefer not to choose individual stocks, many exchange-traded funds offer broad exposure to international stocks. Here is Morningstar’s shortlist of the best international equity ETFs, those funds that earn a gold rating from Morningstar analysts. The ratings are as of January 27, 2023.
- ETF Dimensional International Core Equity Market DFAI
- iShares Core MSCI Total International Stock ETF IXUS
- Vanguard FTSE Europe ETF VGK
- Vanguard FTSE All-World ex-US ETF VEU
- Vanguard FTSE All-World ex-US Small-Cap ETF VSS
- Vanguard Total International Stock ETF VXUS
- Vanguard Total World Stock ETF VT
There are several international Morningstar categories represented on our Gold List. Dimensional International Core Equity Market ETF, iShares Core MSCI Total International Stock ETF, Vanguard FTSE All-World ex-US ETF and Vanguard Total International Stock ETF fall into the large foreign mix category. Large-cap foreign funds tend to focus on Europe, particularly established markets in France, Germany, Switzerland, the Netherlands, Spain, Italy and the UK. They also often occupy important positions in Asia. And although they are interested in emerging market stocks, they often limit their exposure to these markets to around 15% of their assets. Foreign small/mid cap funds often hold larger positions in emerging markets.
Meanwhile, Vanguard FTSE All-World ex-US Small-Cap ETF favors, as its name suggests, international small and mid-sized stocks, while Vanguard FTSE Europe ETF invests in European stocks. And finally, Vanguard Total World Stock ETF categorizes as a broad global stock mix, which means it invests globally, including US stocks.
As always, read an ETF’s analyst report to get a better idea of the regions it invests in, the size of companies it favors, and more. Knowing how an ETF’s portfolio deviates from the average allows for better performance expectations and better results for investors. For example, emerging market stocks tend to be more volatile than developed market stocks. As a result, international equity ETFs with higher emerging market exposures will perform significantly differently than their peers when emerging markets rise or fall.
To learn more about how Morningstar rates ETFs, read Morningstar’s Guide to Investing in ETFs.
How to find more long-term international stocks and ETFs
Investors who want to find more international stocks and ETFs to consider can do a few things.
- Review all international stocks on the Morningstar Global ex-US Moat Focus Index portfolio page. Remember that the index focuses exclusively on undervalued non-US stocks with wide or narrow moat ratings.
- Expand your search to also include highly rated mutual funds. You’ll find some of Morningstar’s top-rated international equity mutual funds on our Top Foreign Funds and Foreign Index Funds lists.
- ETF die-hards who want to consider more options can find top-rated international equity ETFs (and highly rated ETFs in other categories as well) on our award-winning ETFs list.
Morningstar, Inc. licenses indices to financial institutions as tracking indices for investable products, such as exchange-traded funds, sponsored by the financial institution. License fees for such use are paid by the sponsoring financial institution based primarily on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar Index. Morningstar, Inc. does not market, sell, or make any representation regarding the advisability of investing in any investable product that tracks a Morningstar Index.
