The Post-Pandemic Case for International Markets

As businesses adjust to the new “normal,” we believe the case for international markets is, once again, strong.

Preview

Over the last 10 years, US large-capitalization (large-cap) equities have experienced a tremendous run, with the relative strength of US dollar (USD) helping the cause.1 However, if you look back 10 years prior (2000–2010), you’ll find that international markets delivered better returns.2

Looking forward, here are three key reasons why we believe the case for international markets is, once again, strong:

  • Lower valuations: International equities have relatively lower valuations versus US equities.
  • Economic recovery: We believe countries that are taking a more measured approach will still see the benefits of their stimulus packages, but that the market’s response will take longer to materialize. Moreover, there are countries outside the United States that have been a better model for handling the COVID-19 crisis (including smart lockdowns, testing and tracing strategies versus a disarray of conflicting policies). Other countries managed to act early to systematically control the pandemic and have experienced less disruptions, and appear better positioned to bring their businesses and economies back. In addition, we believe these countries remain vigilant with continuous enhancements to face the evolving virus and continue to benefit from centralized strategy, creating a more sustainable recovery with less risk for regression/relapse.

  • Foreign currency: During the worst of the COVID-19-induced downdraft, we witnessed flight-to-safety behavior driving USD appreciation relative to many foreign currencies. Most notably, by the end of the first quarter 2020, we saw the USD appreciate 29%, 28%, 26% and 24% against the Brazilian Real (BRL), South African Rand (ZAR), Russian Ruble (RUB), and Mexican Peso (MXN), respectively.3 After that initial rush, we expect foreign currencies to recover versus the USD; in fact, we saw signs of recovery against the Australian dollar (AUD) as well as against developed European currencies, and expect that other foreign currencies will likely start to strengthen, providing extra tailwind to international investing.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with developing markets are magnified in frontier markets.

ENDNOTES

  1. Source: Bloomberg, August 2020. The S&P 500 Index returned 227.5% vs. MSCI ACWI ex-US Index, which returned 40.53% from 12/31/2010 to 8/14/2020. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

  2. Source: Bloomberg, August 2020. The S&P 500 Index (SPX) returned 15.07% vs. the MSCI ACWI ex-US Index, which returned 71.53% from 12/29/2000 to 12/31/2010. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

  3. Sources: The World Markets Company, Reuters, August 2020.