Don’t look now, but foreign stocks are starting to sizzle.
After years of disappointing performance relative to U.S. investments, foreign stocks are emerging as the hottest ticket in town.
They’re on sale compared to U.S. stocks. “We’re now in the eighth year of the bull market in U.S. equities, and it’s increasingly difficult to find bargains,” complains Russ Koesterich, portfolio manager at BlackRock.
After that long run-up, U.S. stocks are now priced above historical average valuations, while European and other foreign stocks trade below their normal levels.
By some measures, foreign stocks may now be trading at as much as a 15% discount. And you know what a discount means. It means you’re getting a really good deal.
Foreign stocks tend to pay you higher dividends. And who can’t use a little extra income nowadays? While the average U.S. stock pays about 2% in annual dividends, you’re paid a princely 4.8% per year in the U.K. and a respectable 2.9% in France. Outsized yields are also routine in Australia, Canada and Germany.
And surprisingly, dividend yields on foreign stocks are often significantly higher than yields on government bonds in those same countries, making them look like relative bargains.
Owning non-U.S. stocks helps you diversify. You’re already familiar with the mantra about “not putting all your eggs in one basket,” right? It’s healthy to invest in different geographic areas, and helps minimize your exposure to one economy or political regime.
More importantly, it keeps you from missing out on valuable opportunities. “If you limit yourself to just U.S.-based companies, you’re essentially missing out on the investment opportunities of about three-quarters of the global economy and about half of the stock market’s value,” explains American Funds.
It is perfectly understandable for Americans to want to concentrate their investments in U.S. companies and markets, but some diversification is always a good thing. At Vanguard, for example, up to a hefty 40% of clients’ overall stock allocations is being directed to international stocks.
And don’t forget emerging markets, those less-developed economies whose rising masses of young, more-educated consumers have got them on a tear. “My contrarian recommendation is to diversify away from the expensive U.S. markets into the unloved emerging markets,” says Rob Arnott of Research Affiliates, interviewed by Bloomberg.
Is the international investment drought finally over? International stocks have been in a rut for several years, but in a world of market cycles, that might just mean they’re ready to reemerge as tomorrow’s top performer.
So far this year, developed and emerging international stocks have taken top honors for investment performance. That’s why much of the smart money is now betting on European, emerging market and other foreign stocks to generate impressive results in 2017.