Isabelle Wang
Recent rally in foreign stocks reflects ‘bear market rally’, not indicative of next recovery market prices: analyst
Investors are raising money from U.S. equities to increase their exposure to international equity markets, betting that Europe and emerging markets could benefit from a weaker dollar.
The S&P 500 Index is up 3.5% so far in 2023, and U.S. stocks have posted an impressive start to the year, but still lag behind their peers in other regions.
The MSCI EAFE Index, which tracks the performance of equities in Europe, Australia and East Asia, is up more than 15% over the past three months, while the MSCI Emerging Markets Index is up 17% from its mid-October low. According to Dow Jones Market Data, MSCI USA’s 12% return marks the large- and mid-cap segment of the US market.
“Global equity markets have outperformed the S&P 500 since mid-October when the US Consumer Price Index (CPI) confirmed an inflationary peak, triggering a global pullback from US dollar security.” Comerica Wealth Management Chief Investment Officer John Lynch wrote:
Mark Haefele, chief investment officer at UBS Global Wealth Management, expects international equities to deliver “excellent returns” to the S&P 500 over the next few market cycles. He advises US investors to diversify their strategic over-exposure to their home markets.
“Given the relatively high valuations of U.S. equities and the heavy weight on the technology sector, which is particularly vulnerable to rising interest rates and slowing economic growth, it is the least favorite in the U.S. in the short term.” rice field. Note.
See also: USD hits first ‘dead cross’ since 2020 as rally unravels.
The recent depreciation of the US dollar has heightened optimism for international stocks, where investors can benefit from foreign companies that derive most of their earnings from outside the United States. A weaker dollar can boost earnings in USD terms and make international earnings more valuable.
After rising for much of 2022, the dollar’s value against other currencies has fallen over the past few months on fears of a recession as the Federal Reserve hikes interest rates. The ICE US Dollar Index, a measure of the dollar against a basket of six major currencies, retreated 11% to 101.84 from a 20-year high set in late September, according to Dow Jones Market Data. .
See also: Europe has avoided an energy collapse. But is the crisis over?
Warmer-than-expected temperatures in Europe and the abundance of natural gas storage facilities are also providing relief to Europe’s economic outlook, which has been faltering on concerns about post-Ukrainian war inflation and winter power shortages. China’s rapid reopening of its economy after lifting pandemic restrictions could also boost the value of European stocks.
But is this really the end of the past decade of US stock market outperformance?
Since the global financial crisis of 2008, U.S. stocks have outperformed their international peers, making the U.S. market an easy place for investors to deposit their money.
“‘Heaven made it to the United States’ — if you have that mindset, you probably need to increase international allocations over time, not the other way around…it gets worse It just works. People aren’t readjusting it…” said Krishna Mohanraj, portfolio manager at Diamond Hill Capital Management, in a phone interview.
See also: Foreign investors are back in Chinese stocks as the economy reopens after COVID restrictions are lifted
However, some analysts believe the recent rally in international equities reflects a “bear market rally” rather than indicating that the market is pricing in the next recovery.
“We believe it is simply premature, given the huge steps to be taken by developed market central banks and the traction needed to achieve a recovery in emerging markets. ,” Lynch said in a note on Tuesday.
Almost a year after the Fed’s tightening cycle to keep inflation in check by raising rates, investors expect the central bank to stop rate hikes soon and start cutting rates by the end of the year to combat the recession. I’m betting it’s even possible.
However, the European Central Bank is expected to remain hawkish, with bank officials hinting at two more 50 basis point rate hikes at their February and March meetings. In emerging markets, China’s central bank is likely to keep the banking system’s current liquidity intact, recovering rapidly from COVID-19 lockdowns without changing borrowing costs for the fifth consecutive month. Ensure sufficient liquidity to boost the economy. A Reuters survey showed.
Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co, said Europe’s energy prices will be a persistent problem, but the grounds for quality U.S. stocks are still there. We advise investors to overweight U.S. stocks relative to
“(U.S. markets) are more resilient markets to global economic downturns, so if the global economy weakens, U.S. companies are more flexible on their cost base. (They’re) more willing to protect. And generally they have a more defensive business model just by building,” he told MarketWatch by phone.
“In a global economy that is in a soft landing, I recognize that Europe and Japan will perform better than the United States, but they are not. In our view, there is definitely the potential for a real slowdown, in which case we want to invest in the most defensive stocks.”
– Isabel Wang
(Closed) Dow Jones Newswire
01-25-23 1156ET
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