NEW YORK, Jan 13 (Reuters) – Some U.S. investors are looking overseas for better stock returns in the coming months, betting European and international stocks have more attractive valuations after a long period of U.S. dominance.
US equities rebounded to start the year after a tough 2022, but still lag their international counterparts. The European STOXX 600 index (.STOXX) has gained some 17% since the end of the third quarter, compared to 11% for the American benchmark S&P 500 index. 20% during this period.
European stocks have benefited as a mild winter has so far helped the region avoid a feared energy crisis, investors said. Moderating commodity prices helped, as did the reopening of the Chinese economy and a weaker dollar; some expect the force to continue.
“Relatively speaking, we now have more money looking for better opportunities outside of the United States, which has not been the case in recent years,” said Martin Schulz, head of the international equity group at Federated Hermes. .
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Federated Hermes said this week it was moving from a “moderately bearish” view on stocks to a “moderately positive” view, entirely by adding to international markets.
US stocks have long dominated their international peers. The S&P 500 is up more than 460% from the lows of the Great Financial Crisis in March 2009 to last year, compared to a 170% gain for the European STOXX during this period.
This period largely coincided with rock-bottom interest rates, an environment that favored US equity indices which are much more heavily weighted in tech stocks than equity indicators in Europe. The tech sector makes up 26% of the S&P 500. The group is only about 7% in the STOXX 600, which is much more heavily tilted towards financial and industrial stocks.
But the rules of the game have stabilized considerably over the past year as central banks around the world have raised interest rates to fight inflation. Higher rates tend to put particular pressure on valuations for technology and other high-growth stocks, while potentially benefiting banks and other heavily weighted value stocks in Europe.
“One of the secular things that helped US equities was unconventional monetary policies, and those have come to an end,” said Alessio de Longis, senior portfolio manager for Invesco Investment Solutions in New York.
Last month, the company moved more toward international equities by increasing its overall equity exposure, de Longis said.
International equities were recently touted by investor Jeffrey Gundlach of DoubleLine Capital and BofA Global Research, who predicted global equities would “crush” their US peers in 2023.
Even with their recent strength, the European STOXX is still trading at a steep discount, with a forward price-to-earnings ratio of 12 versus a P/E of around 17 for the S&P 500, according to Refinitiv Datastream. This valuation gap is close to its largest ever and is more than double its historical average.
“Every metric you can track from a valuation perspective shows that international stocks are historically cheap relative to the United States,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.
Another boost for international equities came from recent weakness in the dollar, which is down about 9% since the end of the third quarter after a huge run. The weaker greenback benefits U.S. investors when they convert foreign earnings into their home currency, and some investors believe the dollar could continue to slide if it appears the Fed is getting closer to suspending its rate hikes. .
Some investors believe that US equities will soon regain their dominance over stocks tied to other regions. Since 2012, the United States has tended to outperform equities in the rest of the world, with an average difference of 1.7 percentage points over a typical 50-day window, according to Nicholas Colas, co-founder of DataTrek Research.
“While we can see the merits of low-valued non-U.S. equity markets, their recent outperformance prompts investors to be cautious as they continue the recent rally,” Colas said in a note this week.
A widely expected global recession could be a factor sending investors back to U.S. stocks, which many see as a relative haven in times of economic uncertainty, investors said.
Buying international stocks could be a “complement” to the domestic opportunity, said Mona Mahajan, senior investment strategist at Edward Jones.
“US markets haven’t rebounded as much yet and so I think there’s still a fundamental opportunity in the US to catch up there,” Mahajan said.
Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio
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