Two the Point — Why Own International Stocks?

Developed international stocks have underperformed the S&P 500 by a cumulative 150% over the last ten years.1  As a result, many investors are giving up on their international equity allocations.  We would caution investors to reconsider that for two key reasons.

     

    1.

    International stock indexes are tilted significantly toward value and away from the growth/technology stocks that dominated the last decade.  For example, the technology sector is a 25.6% weight in the S&P 500 versus a 7.8% weight in developed international indexes (MSCI EAFE).  Although we believe quality growth stocks will perform relatively well in 2023, we question their ability to duplicate the outperformance seen over the last decade.  Interest rates are no longer at zero and investors are no longer willing to pay any price for future growth.  Fundamentals matter, and we think the growth bubble will likely remain deflated during the next market cycle.  This would be a tailwind for international stocks.

     

    When Value Outperforms So Do Developed International Stocks

    Source: Factset; Bryn Mawr Capital Management (as of 2/8/23)
     

    2.

    Developed international stocks are cheap relative to U.S. stocks.  Although valuation is not helpful with short-term market timing, it is a critical component of long-term return potential.  The valuation spread between international and domestic stocks remains historically wide.  In our view, the recent rise in interest rates may be the catalyst needed for value/international stocks to outperform over a more sustained period, and the current valuation differential favors higher forward returns outside of the United States over the next five to ten years.

     
    Source: Factset; Bryn Mawr Capital Management (as of 2/8/23)
     

    1 Factset

     

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