International Equities – Re-Evaluating Our View
Since we last wrote about international equities in early December of 2022, the asset class has outperformed domestic equities though the pure calendar quarter numbers show the two allocations to be performing close to each other, according to Bloomberg.
Have the reasons to consider investing in international equities changed? In our 12/6/22 blog, we gave 3 reasons to consider investing in international equities. Let’s look at these and see if they are still valid…
1.The longer something underperforms, the more likely it is to outperform.
Current Outlook: Changing but still present.
We saw an outperformance of international equities in Q4 2022. In calendar Q1 2023, international equities slightly underperformed US equities. However, on a valuation multiple basis (using P/E), US equities were more expensive than international equities at the end of Q1 2023 (18.8x vs. 13.0x)*. This leads us to believe there is more room to run for international equities.
2. As the US dollar depreciates international equities will appreciate – the performance is inverse.
Current Outlook: No change.
The market is currently pricing in interest rate cuts bringing the Fed Funds Rate to 4.57% from its current rate of 4.83% by the end of the year. * In theory this should provide a tailwind for international equities as the US dollar depreciates.
3. Institutions arbitrage away higher yielding investment opportunities until they meet lower yielding opportunities [equilibrium] when there are disconnects due to regulatory regimes [read interest rate regime].
Current Outlook: Changing but still present.
While fixed income posted a positive return for Q1 2023, there was significant interest rate volatility in the market. Further, looking at the monthly numbers, moves in interest rate indices mirrored that of equity indices, implying that while investors can earn a higher yield in fixed income and institutions will move into that asset class as well, international equities also still yield more than domestic equities (7.7% vs. 5.3% on an earnings yield perspective, MSCI ACWI ex US vs. S&P 500)*.
These three potential tailwinds for international equities remain in place and are playing out. While nothing is guaranteed, we believe that relative valuations and economic drivers increase the potential of outperformance for international equities and create compelling reasons for the diversified investor to have exposure to this important asset class.
*Source: Bloomberg
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Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.