Don’t Count Out Non-U.S. Stocks

Investors can’t complain about 2019. So far almost every major global asset class is up solidly, led by U.S. large caps and growth stocks, which are up more than 20%. This is a mirror image of 2018, when cash was the only asset class that had a positive return.

The reason for all the gains is mainly a return to the post-financial crisis dynamic in which low interest rates and dovish central banks have led to low volatility, outperformance of growth-style stocks over value style and the consistent outperformance of the U.S. versus the rest of the world.

恢复这的长期影响s trend—more debt and slower growth—is not necessarily worth celebrating. Stocks are already expensive, having priced in a lot of good news, and economic growth in the U.S. is decelerating. I remain cautious on U.S. markets and think this is a good time for investors to stick with their global asset allocations.

Below are three non-U.S. regions that may outperform the U.S. going forward and why:

• Europe: Disappointments in the European Union have included political instability, a collapse in interest rates and economic data that suggests a recession may already be underway. Positives? These negatives are already priced into markets, leaving potential for upside if the economy improves, which it should. I expect much more central bank stimulus to come and applaud the appointment of Christine Lagarde as the next head of the European Central Bank. Plus, Morgan Stanley’s proprietary market timing indicator suggests this could be a good time to invest in Europe.
• Emerging Markets: These economies should benefit from China’s economic stimulus and improvement in global trade. I also think Federal Reserve interest rate cuts will benefit these countries by keeping the U.S. dollar stable and global inflation tame. EM central banks have room to cut rates, stimulating their economies. Already India, Indonesia, Philippines and Malaysia have cut rates.
• Japan: Low interest rates and corporate governance reform are finally leading more companies to use stock buybacks to recapitalize their balance sheets. That trend has been a major contributor to strength in U.S. markets for the past decade. Japanese stocks (as well as stocks in the EU) should benefit from a material pickup in this shareholder-friendly practice.

It’s late in the business cycle and this year may still include a mild recession in the U.S. and a recovery in the rest of the world. That could cause non-U.S. stocks, which have lower valuations, higher dividend yields, and more operating leverage, to outperform U.S. stocks. Given that, I think investors should stick with their global asset allocation plan and hold onto their exposures in Europe, Japan and emerging markets.

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