Speaking at Schwab Impact in late October, Jeffrey Kleintop, the giant firm’s chief international strategist, told advisors it was time to rebalance clients’ portfolios from domestic growth, which has outperformed for most of the decade, to international equities and domestic value stocks. If history is a good predictor of the future, Kleintop is certainly correct. The last time U.S. large-cap growth stocks outperformed by so much for so long ended in 2000, which was followed by the so-called Lost Decade.

Rob Arnott, non-executive chairman of Research Affiliates, thinks 2019 will be one of transition with possible recessions in pockets of the world rippling out from Europe. “You have fiscal policies all over the world focused on stimulus” at a time when global growth is moderating, he notes.

“It begs the question: Does stimulus really stimulate?” he continues. “Stimulating a mature economy is a good way to set it up for a steeper recession.”

The two big costs are increased debt and increased inflation, though the latter has failed to materialize despite the Herculean efforts of the planet’s central bankers. Thankfully, Arnott says, at least America’s Federal Reserve has built up a small store of dry powder to fight the next recession. Many other nations will have fewer options.

Like GMO’s Jeremy Grantham and many others, Arnott is confident that emerging market stocks will outperform America’s for the next five to seven years. “With a Shiller P/E ratio below 10, it is the closest thing to a bargain today,” Arnott says, explaining that in emerging markets one can buy half the world’s GDP at 9 times earnings. At that price, the fact that many emerging market stocks are government-owned enterprises that aren’t run to maximize shareholder value is baked into the price.

Others disagree. Bhansali maintains that emerging markets have been a “growth trap” for most of the last decade. “Going forward, they will be a value trap,” she argues. “The low P/E ratios are a head fake.”

Problems with emerging markets extend beyond governance and state-owned enterprise issues. Bhansali observes that a large portion of the companies in this asset class operate in commoditized industries that historically command low multiples like materials, mining and banks.

Bhansali notes that just when Europe was beginning to recover in 2015 and 2016, Brexit occurred, derailing the European recovery. Banks in Europe never recapitalized, and the stock price of the continent’s largest bank, Deutsche Bank, has been falling for years.

Rising Populism And Disruption

But there are definitely bigger issues to deal with when it comes to international investing besides bad banks and asset location. Ever since the Berlin Wall fell in 1989 and the U.S. Congress ratified NAFTA in 1993, the investing climate has been hardwired and optimized around an integrated world with limited constraints on the mobility of capital and labor, McMillan notes.

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