SKARBECK: Stock markets overseas may have more upside

February 2, 2018

Ken SkarbeckStock markets around the world are on the rise. Countries across the globe appear to have finally shaken off the debilitating effects of the credit crisis, and today’s environment is being described as “synchronized global growth.” With the United States perhaps in the later stages of an extended bull market, many pundits expect international and emerging stocks to outperform domestic stocks going forward. Foreign markets appear to be a few years behind in the economic recovery and current valuations for foreign businesses are cheaper than for U.S. businesses.

Back in the fall of 2008, the Federal Reserve implemented an unconventional monetary tool called quantitative easing, or QE, to counteract the financial crisis. The process of QE required the Fed to purchase enormous amounts of government securities, which effectively lowered interest rates dramatically. The resulting record-low interest rates were meant to stimulate bank loans and improve the economy. The low rates also served to boost the value of stocks, bonds and real estate.

In October, the Fed finally signaled an end to its QE operations as the Fed’s Board of Governors determined that, with U.S. GDP growth improving, the economy could handle a modest rise in interest rates. In Europe and Japan, central banks are still conducting QE while their economies remain on the mend. Nevertheless, all central banks are under pressure to seek more normalized monetary policy.

Last year, stock markets across the world rose concurrently. The S&P 500 index rose 21.8 percent, an index of international developed stock markets (think Japan, UK, Germany, France) rose 27.2 percent, and an emerging-markets index (China, India, plus others) soared 37.3 percent.

The best-performing emerging market last year was Argentina (up 77 percent), followed by Turkey (up 48 percent) and Nigeria (up 42 percent). The worst performer was Qatar (down 18 percent).

Some observers believe emerging markets have further to run as they catch up with the rest of the world. In the four years before 2017, the ETF symbol EEM, which tracks an emerging market index, lost a cumulative 13.4 percent. The investment firm GMO lists emerging stocks as the only equity category it expects to deliver positive real returns over the next seven years, with a 1.5 percent annual return over the inflation rate.

Also indicative of the wide-reaching economic improvement is the recovery taking place in Greece. Once the poster child of economic chaos, Greece raised 3 billion euros this summer in its first bond issue since 2014. The country has three more bond issues planned in the coming months.

While Greece is still dealing with economic challenges and sanctions put on after three bailouts, Greek bonds—amazingly—have recovered, leaving two-year debt trading below 2 percent—which is lower than the equivalent U.S. Treasury note!

Movements in the currency markets also affect the global economy. The surprising weakness in the U.S. dollar, which hit a two-year low against the euro, has observers wondering if the Trump administration favors a lower dollar, which makes U.S. exports more competitive on global markets. Usually, with interest rates rising, the dollar would be strengthening.

With foreign currencies strengthening against the dollar, foreign stock markets should attract higher capital inflows. Therefore, investors might consider adding some exposure to international and emerging markets in their portfolios.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 317-818-7827 or ken@aldebarancapital.com.


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