Wall St Week Ahead: US Investors Seek Gains in Overseas Stocks

NEW YORK, Jan 13 (Reuters) – Some U.S. investors are looking abroad for better equity returns in coming months, betting that European stocks and other international stocks maintain more attractive valuations after a long period of U.S. dominance. United.

US equities rebounded to start the year after a difficult 2022, but still lagged their international counterparts. Europe’s STOXX 600 index (.STOXX) has gained about 17% since the end of the third quarter, versus 11% for the US benchmark S&P 500 index. .

European equities have benefited as a mild winter so far has helped the region avoid a feared energy crisis, investors said. Moderation in commodity prices helped, as did China’s reopening economy and a weaker dollar; some expect the strength to continue.

“Relatively speaking, we have more money now chasing better opportunities outside the US than we have in recent years,” said Martin Schulz, head of Federated Hermes’ international equities group.

Federated Hermes said this week it is shifting from a “modestly bearish” view on equities to a “modestly positive” view, entirely adding to international markets.

US equities have long dominated international peers. The S&P 500 is up more than 460% from the lows during the great financial crisis of March 2009 through last year, compared with a 170% gain for Europe’s STOXX over that period.

That period largely coincided with lower interest rates, a backdrop that favored US stock indices, which are much more heavily weighted in tech stocks than stock gauges in Europe. The tech sector makes up 26% of the S&P 500. The group has only about 7% in the STOXX 600, which is much more focused on financial and industrial stocks.

But the playing field has leveled dramatically in the past year as central banks globally raised interest rates to fight inflation. Higher rates tend to put pressure on valuations of technology stocks and other high-growth stocks in particular, while potentially benefiting banks and other heavily value-weighted stocks in Europe.

“One of the centuries-old elements that helped US equities was unconventional monetary policies, and they’ve come to an end,” said Alessio de Longis, senior portfolio manager at Invesco Investment Solutions in New York.

The company last month moved more into international equities as it increased its overall equity exposure, de Longis said.

US vs Europe stock performance

International equities were recently praised by investor Jeffrey Gundlach of DoubleLine Capital and BofA Global Research, who projected that global equities would “crush” their US peers in 2023.

Even with its recent strength, Europe’s STOXX still trades at a steep discount, with a futures price/earnings ratio of 12 versus a P/E of around 17 for the S&P 500, according to Refinitiv Datastream. This valuation gap is close to being the largest ever and is more than twice the historical average.

“Every metric you can track from a valuation perspective shows that international equities are historically cheap relative to the US,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.

Another boost for international equities has come from recent weakness in the dollar, which has fallen about 9% since the end of the third quarter after a big rally. The weaker dollar benefits US investors as they convert foreign earnings back into their local currency, and some investors believe the dollar could continue to decline if it looks like the Fed is moving ever closer to halting its rate hikes.

Some investors think that US equities will soon regain their dominance over equities tied to other regions. Since 2012, the United States has tended to outperform the rest of the world, with an average difference of 1.7 percentage points over a typical 50-day window, according to Nicholas Colas, co-founder of DataTrek Research.

“While we can see the merits of lower-rated non-US equity markets, their recent performance indicates that investors should be cautious in chasing the recent rally,” Colas said in a note this week.

A widely expected global recession could be a factor driving investors back to US equities, which many see as a relative safe haven in times of economic uncertainty, investors said.

Buying international equities can be a “complement” to the domestic opportunity, said Mona Mahajan, senior investment strategist at Edward Jones.

“The US markets haven’t recovered that much yet, so I think there’s still a fundamental opportunity in the US to catch up,” Mahajan said.

Reporting by Lewis Krauskopf; Edited by Ira Iosebashvili and David Gregorio

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