"International Markets: Not Quite There, Yet"
When investors think of or discuss “the stock market”, most tend to focus on the US market defined by the Dow Jones or S&P 500. However, international markets can play a vital role in client portfolios due to diversification and the opportunity for enhanced long-term return. Today, we are going to provide a primer on international stock markets along with recent performance and our suggestions for international stock allocations.
According to Vanguard, the Total World Stock Market includes approximately 7,400+ stocks of companies located in 47 countries, which are categorized into three major categories: U.S. Market, Developed Markets, and Emerging Markets. The U.S. market makes up approximately 56%, Developed markets make up roughly 34%, and Emerging markets make up the remaining 10%. Per Nasdaq, a developed market is one that has high levels of liquidity, meaningful regulatory bodies and high level of per capita income. Developed markets include European countries (United Kingdom, Germany, and France, etc.) and Asia-Pacific countries such as Japan, Hong Kong, Australia, and New Zealand. Emerging market definitions can be vague but are essentially countries that are in the process of rapid growth and development with lower per capita incomes. Countries that comprise Emerging Markets include China, India, Brazil, Russia and Mexico.
In terms of market performance, we have witnessed a significant differential over two distinct timeframes. From the beginning of 2008 to present, the stock market performance of Developed and Emerging Markets have significantly underperformed the US market (see chart 1 below). However, the U.S. stock market does not always lead performance. Looking back to the range from 01/01/2001 – 12/31/2007 (chart 2), the U.S. markets underperformed both Emerging and Developed markets with Emerging markets displaying significant outperformance during that time
As we can see, the recent performance spread between the U.S. compared to international markets has been significant. International markets have suffered from economic challenges and geopolitical events that have hampered growth and made investors wary of stocks in those regions. It is our opinion that international stocks should remain underweight relative to their global market cap but investors should keep some allocation to international stocks. As we focus on the fundamentals, once we see data that reflects an improving fundamental picture, we would be willing to increase our recommended allocations.