Time for advisors to consider hedging their equity bets by looking overseas.
That is the argument for more international investing made by several managers. After close to a decade of outstanding U.S. equities performance based on favorable domestic factors, they said, the fundamentals of international investing are improving.
The potential for a trade war will likely hurt U.S. stocks, so it makes sense to diversify and to have a piece of the Chinese economy, they said. Moreover, the U.S. stock rally could be primed to run out of gas because the fuel that recently fired it—stock buybacks and tax cuts—has run out. They also noted dividend yields on U.S. stocks are starting to slow.
“If you look at dividend yields, they’re lower in the United States, but compared to 10-year bonds, there’s a negative spread," states the ClearBridge Investments' report, “Things Change: The Case for International.” "That’s the opposite of the international markets where bond yields are sometimes minus or just above zero and we get a positive spread.”
The report, by Clearbridge managers Elisa Mazen and Michael Testorf, contends that a trade war between the United States and China could boost the international sector.
“If the trade war intensifies, it would be logical for China to conduct further stimulus,” the report says. It adds that other trade wars could also break out at the same time the world’s two biggest economies are battling.
The authors also noted that international investing has had its big innings before and will likely do so again. “If you look back, international performance was very strong from the years 2002 to 2003, with international outperforming the U.S. by a factor of two to one roughly,” the report says.
Another play on overseas investing is international small cap. One of its strong points, according to a white paper by Royce Associates, is that it has been widely ignored in terms of market weighting.
Royce said only about 1 percent of mutual fund assets in the U.S. are invested in small caps outside the U.S. “We suspect that many asset allocators think of international small caps (if they think of them at all) as a nearly indistinguishable subset of the large non-U.S. equity universe,” states the white paper, “Putting International Small Caps on the Map: The Case for Allocating to International Small Cap Stocks.”
International small caps, said David Nadel, a portfolio manager with Royce Associates, are distinctive. They have less volatility than domestic small cap and can provide portfolio diversification.