A revival in international stocks is beginning to make headlines. While emerging market returns in particular have been strong over the past 12 months, the resurgence of Europe is an especially welcome sight. Recall that Europe has been the Bad News Bears of the financial markets over much of the past decade, as a seemingly endless string of financial crises has kept stocks in check.
So what has changed? Political fears are subsiding as elections in the Netherlands and France have avoided the populist trend witnessed elsewhere. Economic growth the past 2 quarters has been stronger in the Eurozone than the U.S., and purchasing manager surveys are also showing stronger growth. Throw in more attractive stock valuations, lower levels of corporate debt, and the expectation of higher earnings growth this year versus the U.S., and investors are taking notice.
A strong rise in the U.S. Dollar over the past 6 years has been a major headwind to U.S. investors’ foreign market returns. By the end of 2016, the trade-weighted Dollar was nearing the highest level it has ever reached since the inception of the Euro. Since then, it has started to give up some ground, which is juicing foreign market returns for U.S. investors. Seeing as the currency still remains not far off its high, this improving currency translation could continue.
Another potential source of fuel for the fire could be a shift in capital flows. While U.S. retail investors are notoriously underweight in foreign equities, I read recently that institutional investors’ allocation to foreign equities is at its lowest level in 25 years (Barron’s, May 15, 2017). Money flowing back into these markets could also give stock prices a lift.
If the economic cycle in Europe is about where the U.S. was several years ago, this could get interesting.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®