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PITTSBURGH — There really is no place like home and many investors tend to keep their investment strategies heavily weighted toward U.S. company stocks. Something that falls within their comfort zone feels like a safer bet.
But investors who insist on staying close to home in today’s stock market environment could be undermining their odds for achieving higher returns. While U.S. stocks have substantially outperformed foreign markets for the last several years, the tide may be shifting.
Overseas markets have been outperforming U.S. stocks by a substantial margin this year, which is why some advisers are suggesting that investors venture out more — partly to avoid concentrating too many eggs in the U.S. basket and partly to take advantage of the rising trend in foreign markets.
“Valuations also are driving a potential shift,” said Bernard Carter, chief investment strategist at Hapanowicz & Associates Financial Services in Pittsburgh. “If you look at U.S. markets and U.S. stocks versus foreign stocks, foreign stocks are a bit cheaper in terms of their price relative to their sales and relative to their earnings.
“Dividend yields, in general, are also quite a bit higher than dividend yields on U.S. stocks,” Carter said. “These are all items that are contributing to what could be the beginning of an outperforming period for foreign stocks.”
Carter said his firm’s global asset allocation for the last several years had been about 75 percent U.S. stocks and 25 percent foreign stocks. However, Hapanowicz & Associates has re-allocated its assets to a 65-35 percent split.
For the sake of comparison, the S&P 500 index has risen a healthy 9.98 percent so far in 2017. The MSCI Europe index, which measures average returns on stocks in about 15 different European markets, is up by 16.14 percent.
The tale of U.S. versus foreign stocks was a much different story last year. The MSCI Europe gained only 0.15 percent in 2016, while the S&P 500 was up by 11.95 percent.
Bill Stone, global chief investment strategist for PNC Bank in Philadelphia, is bullish on international stocks and particularly stocks of European companies.
“International equities offer geographic diversification and open the opportunity set to invest in firms worldwide,” Stone said. “Beyond the benefits of diversification and exposure to many of the world’s leading companies, there are other potential benefits to investing outside U.S. borders, including unique opportunities in Asia and Europe.
“Within the international equity component, we recommend an allocation to emerging markets,” he said. “It is reasonable to assume that the U.S. and other developed markets have similar long-term expected returns. Much of the difference is likely to come from currency gains or losses. We remain mindful of the currency risk inherent in international investing.”
He said while at times the weaker dollar makes international investing look more attractive than underlying fundamentals might dictate, the reverse is true when the strong dollar punishes U.S. investors’ international returns.
“Our tactical allocation within the international allocation focuses on Europe-based and Japan-based holdings,” Stone said. “Stabilizing recoveries in both Europe and Japan, relative valuations, improving corporate earnings and low energy prices are a few of the dynamics that support strength of equities in the regions.”
The tables began turning for foreign stocks around July 2016, according to Mark Luschini, who oversees $4 billion in assets as chief investment strategist at Janney Montgomery Scott, also in Pittsburgh.
He said investors became increasingly aware of valuation disparities between U.S. and foreign stocks.
“It was really synchronic global acceleration, but our particular interest is Europe,” Luschini said. “That’s because European economic growth was faster than the U.S. for the first time since 2008. You had the back drop of solid economic activity and attractive stock valuations. And taken together, it encouraged investors to take their money overseas.”
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