With the dollar weakening, it’s time for U.S. investors to get more serious about going abroad for stock market gains. Europe and some other international markets have outperformed the U.S., especially since the back part of 2022, and equity strategists expect that to continue. For instance, since the S & P 500 fell to its closing low on Oct. 12, it has gained about 9.6% as of Tuesday’s close. Meanwhile, the Europe Stoxx 600 is up 15.5% and the Hang Seng is up 27.7% in that same time period. The declining dollar, off 1.3% in the past week, could give international markets an added boost if it continues to fall, as expected. That is particularly true in the case of emerging markets, where dollar strength is a headwind, and there is an immediate economic benefit when the dollar begins to slide. “It’s push and pull. You’re being pushed away from the U.S. and you’re being pulled toward the rest of the world by a variety of factors,” said Michael Hartnett, Bank of America’s chief investment strategist. Hartnett, in a note last week, told investors to “buy the world.” He noted that U.S. stocks “crushed” global stocks for the past 15 years, and now the U.S. is set to underperform the world in 2023. According to Bank of America, $100 invested in U.S. stocks in March 2008 would now be worth $288. But the same $100 would now be just $94 in global stocks, excluding the U.S. “Foreign markets are unloved. Foreign markets are cheap. Foreign markets have been ignored by U.S. investors,” Hartnett said in an interview. “This has been the case for some time. But it’s a great case for investing.” Bull markets Bespoke points out that of the 23 foreign markets it tracks, 15 are currently in bull markets on a local currency basis, with some just reaching that threshold. Several European markets recently entered bull markets, after they all bottomed on Sept. 29. Bespoke describes bull markets as rallies of 20% or more from a low reached after a 20% or more decline. The S & P 500 remains in a bear market. The German DAX is up 23% since Sept. 29, while the French CAC is up 21%. EWQ 1Y line fr Hartnett said the allure of foreign markets has increased as the investment climate changed, with higher interest rates everywhere and a new inflation dynamic. He also said the markets could benefit from “peak Covid” and “peak war,” if the impact of the Russian war in Ukraine does not get worse. “Is the energy market telling us we passed the peak war moment? And if we have, then markets were penalized for being big importers of energy. Europe, China, Japan, Asia are actually going to move from losers to winners,” he said. China’s abrupt lifting of its Zero-Covid policies could speed its reopening, boosting demand in its economy and creating a beneficial ripple effect among its Asian neighbors. The Shanghai Composite finished 2022 with a 15.1% decline, and it has gained 2.6% since the start of the year. “China is the second biggest economy in the world. It’s got 1.5 billion people who have all been locked up,” Hartnett said. “If you think we had excess savings in the U.S. and Europe, you haven’t seen anything yet. You’ve got these positives that have been in place for awhile. You’ve got these new secular catalysts.” China’s reopening Goldman Sachs economists listed the China reopening as a positive for the European economy, helping benefit exporting countries like Germany. The economists said in a note this week that Europe may avoid a recession because of that boost from China, but also because the warm winter weather has sharply reduced Europe’s natural gas prices to pre-war levels. Following Russia’s invasion of Ukraine, Europe has had to replace Russian gas with more expensive alternatives shipped in from elsewhere. “We think global markets still have room to adjust to the sharply better growth outlook in Europe and especially China, with upside in China-exposed stocks, CNH, commodity currencies and industrial metals,” wrote the Goldman economists. CNH is the offshore RMB currency traded outside of Mainland China. The iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI) and KraneShares CSI China Internet ETF (KWEB) are invested in shares of Chinese companies. FXI 1Y line FXI ETF Jeff Kleintop, chief global strategist at Charles Schwab, said there are risks to emerging market stocks from China’s swift reopening. He said Covid continues to spread and could be disruptive. He added that China’s surging demand could also fuel global inflation and push central banks to continue to raise rates more than expected. “Yet, EM stocks could continue to benefit as a recovery in Chinese consumption gets underway, stronger economic growth lift earnings forecasts, while a more pro-growth policy orientation on the economy and housing may boost valuations,” he wrote in a note. “With an understanding that any balancing act between reopening growth and inflation concerns may introduce volatility into the markets, we continue to believe investors should consider an allocation to EM stocks for 2023.” Attributes that could boost outperformance Kleintop said international stocks in general have attributes that could help them continue to outperform in 2023. “International stocks tend to possess more of the characteristics, like high dividend yields and lower price-to-cashflow ratios, that have contributed to outperformance within and across sectors and countries over the past year,” he wrote in a note. “Earnings growth has been stronger outside the United States and is expected by analysts to remain so in 2023. The year-over-year growth earnings growth for S & P 500 companies in the fourth quarter is expected by the analysts’ consensus to be -2.2%, compared to +14.4% for companies in Europe’s STOXX 600 Index.” He said the stronger earnings picture has helped international markets to perform better, along with their lower valuations. That could continue if there’s a pause or reversal in the sharp rise in the dollar last year, he added. The dollar index was up 7.3% in 2022. “After a decade of leadership by the US and tech stocks, rather than concentrating in a particular sector or country, a broadly diversified portfolio with exposure to both international developed and emerging market stocks may reward investors in 2023,” Kleintop said. EEM 1Y line em Kleintop also said emerging markets indexes, dominated by Chinese companies, are off to a strong start this year, leading global gains. Chinese stocks make up 33% of the MSCI Emerging Markets Index. The iShares MSCI Emerging Markets ETF (EEM) represents that index. The fund is up more than 7% in 2023 through Tuesday’s close, and it has gained 17% since the Oct. 12 closing low for the S & P 500. “China’s indirect contribution is even larger, due to its economic influence over its neighbors, Taiwan and Korea which make up and additional 13% and 11% of the index, respectively,” Kleintop said. “While the S & P 500 index is flat since October 31 (through Jan 6), EM stocks are on the cusp of entering a bull market after having risen nearly 20% since October 31.” For the same reasons, JPMorgan strategists upgraded Korea to overweight, and they like tech in Asia that could benefit rom China. They expect upside in South Korean autos, EV battery and solar-based stocks. They expect the MSCI Korea Index could gain 20% this year. There is also an iShares MSCI South Korea ETF (EWY). EWY 1Y line south korea etf Citigroup equity strategists are also positive on China. They are generally neutral on emerging markets but overweight Brazil, due to its attractive valuations. The strategists recently raised Europe to overweight and Australia to neutral. But both the U.S. and Japan are underweights. “We cut the US to Underweight. We are no longer dollar bulls, which helped keep us Overweight in 2022. Valuations remain expensive compared to elsewhere,” the strategists wrote in a note. The Citi strategists say Europe’s cheap valuations are discounting much of the bad news. “Economies should stabilize and rates peak later in the year,” they wrote. While they expect the S & P 500 to gain 4% this year, they expect the Stoxx 600 to gain 8% on a local currency basis, and the FTSE 100 to gain 5%. MSCI Asia, excluding Japan, is expected to rise by 10% and MSCI EM is forecast to rise 8%. There is an iShares MSCI All Country Asia ex Japan ETF (AAXJ). As for sectors, they are overweight on health care. They also like communications as a contrarian overweight. –CNBC’s Michael Bloom and Chris Hayes contributed to this report.
Investors could find better stock market returns outside the U.S. in 2023