Venture abroad, and there’s nothing to gain. That’s the likely view of many investors after witnessing the U.S. stock markets post another solid year. The S&P 500, for example, has delivered double-digit gains in four of the past five years, on its way to a 220% return since March 2009. No other global stock market even comes close.

“A lot of people have given up on international investing, and don’t feel it’s necessary to have an international allocation in their portfolio, which we think is a mistake,” says Russ Koesterich, co-portfolio manager of the BlackRock Global Allocation Fund (MDLOX).

Currency moves make international investing seem even more treacherous for many as the surging dollar has blunted any gains that may have been had. Japan’s Nikkei index, for example, rose 15% in 2016, but that was almost completely offset for unhedged U.S. investors by the 13% drop in the Japanese yen.

The sustained stretch of domestic stock market gains, coupled with the dollar’s recent strength, means that U.S. stocks now account for 40% of the world’s total stock market value, according to FactSet. That’s well above the roughly 25% contribution to global GDP that our economy makes. As a result, by a range of measures, many foreign stock markets now sport more appealing valuations. And that disconnect spells opportunity for many market strategists.

It’s time to look ahead and see where the best investment opportunities exist in Asia and Europe in 2017.

Asia: A Synchronized Recovery
In recent years, investors have been concerned that the Chinese economic juggernaut was slowing rapidly, a clear risk for an economy that has also been beset by rising debt loads. Yet fears of a collapse in China simply never materialized, and it now appears that the Chinese economy will maintain growth in excess of 5% in coming years, as the focus shifts from exports to domestic consumption.

Robert Horrocks, chief investment officer for Matthews Asia, thinks Chinese stock markets may be choppy in 2017, but he’s very bullish about the long term. He cites high savings rates and productivity growth and a resurgent profit picture. “The valuations are pretty compelling, in tandem with a re-acceleration in earnings growth.”

Matthews offers 18 different mutual funds focused on Asia, and the Matthews Pacific Tiger Investor Fund (MAPTX) is the largest, with $7.4 billion in managed assets.

Terry Simpson, a multi-asset strategist for the BlackRock Investment Institute, thinks China’s massive stimulus earlier in 2016 is just now having an economic impact. He notes an upturn in both the nation’s purchasing manager indexes (PMI) and strengthening property markets.
The best way to glean China exposure: “The valuations for the offshore market (Hong Kong-traded H shares) are near lows, so we expect flows from the domestic A shares market towards the H shares market,” says Simpson. The most popular H shares ETFs include the iShares China Large-Cap ETF (FXI), the SPDR S&P China ETF (GXC) and the Guggenheim China Small Cap ETF (HAO).

Not everyone is bullish on China. Sammy Simnegar, who manages the Fidelity International Capital Appreciation Fund (FIVFX), thinks “China represents the greatest threat to the global economy. The country’s problems haven’t gone away, they’ve just been kicked down the road,” he says. He cites falling currency reserves and excess production capacity as some of the factors that could trigger “a big slowdown by 2020.”

Many other strategists interviewed suggest Japanese stocks are poised to deliver solid gains. “Going into 2017, Japan is my favorite market outside the U.S.,” says Jeremy Schwartz, director of research at WisdomTree. “The strong dollar/weak yen setup makes Japan much more competitive,” he says, adding that Japan is “very leveraged to U.S. economic growth.”

Gary Fullam, the chief investment officer at GLOBALT Investments, notes, “We’re finally starting to see positive change in corporate Japan.” In the past, a high level of corporate cross-ownership and employment-for-life culture led to weak investment returns. Indeed, the Nikkei 225 index still sits at just half of its 1989 peak. “Now, companies are opening up, and there’s a greater pressure to maximize profit margins,” says Fullam.

The same phenomenon is coming to South Korea. Charles de Vaulx, chief investment officer of IVA Funds, favors a handful of Japanese and South Korean companies over China. His fund benefited from holding Samsung last year, despite its problems with the flammable Samsung Galaxy Note 7 smartphone. “The stock was cheap because they didn’t treat shareholders” well until activist hedge fund manager Paul Singer of Elliott Management began to agitate the board of directors. Samsung has since increased its dividend and adopted more shareholder-friendly policies.

IVA has also enjoyed strong returns from Japanese pharmaceutical firm Astellas, which is up threefold since 2009. They are “the anti-Valeant. Lots of R&D, no price-gouging and a good pipeline,” de Vaulx says.

As one measure of improved corporate performance, the return on equity for Japanese firms should improve to 9.2% by 2018, which would be a 12-year high, according to Morgan Stanley. That firm recently upgraded its view of Japan by two notches from “underweight” to “overweight.”

And BlackRock’s Koesterich thinks Japanese stocks are “downright cheap.” He notes the Nikkei components are valued at 1.7 times book value, compared with 2.9 times book value for the S&P 500.

Asian Satellites: A Mixed Bag
In the past, a synchronized economic recovery in China and Japan would make it prudent to add exposure to Asian emerging markets that are heavily trade-dependent with those two large neighbors. But that may not be a wise move in 2017 says Win Thin, global head of emerging markets strategy at Brown Brothers Harriman.

“The market is expecting three Fed rate hikes in 2017, and we’re looking for more than that,” he says, adding that “a Fed tightening cycle is fairly disruptive for emerging markets.” Still, when it comes to relative value within emerging markets, “I’m a little more constructive on Asia than I am elsewhere.”

He’s especially keen on the 2017 growth prospects in South Korea, despite that country’s current political turmoil. His firm’s emerging markets model portfolio has a 17% weighting in South Korea, the world’s seventh-largest exporter. The iShares MSCI South Korea Capped ETF (EWY), with a 39% weighting in technology, sports a price-to-book and price-to-sales ratio below 1.0, among the lowest of any major market.

First « 1 2 » Next