Is it Time for International Stocks to Shine?
PSN just gave our International Strategy 5 stars. But that’s not the point of this article.
Because, if you’ve been investing for the past 10 years, you know international equities have not been the most rewarding asset class to hold–compared to domestic equities. Not to mention the headwinds caused by a strong dollar.
So, why bother with international stocks at all?
Here are three reasons why:
- The longer something has underperformed, the more likely it is to outperform.
International last outperformed US Equities [as measured by the S&P 500] in 2017. Based on mean reversion, one could expect international underperformance to outperform since there is no structural reason why international equities would underperform US equities on an indefinite basis.
- As the US dollar depreciates international equities will appreciate – the performance is inverse.
Much of the out or underperformance can be attributed to the performance of the US dollar. In Q4 2022, as the US dollar has depreciated against other currencies, we have seen international equities outperform. As the US dollar is more expensive, and international goods and services are more expensive for non-US consumers (and countries when servicing their US dollar-denominated debts), one can understand that US-based companies should perform better from a fundamental perspective.
- 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 regimes].
The US Federal Reserve [the Fed] front-loaded its interest rate hikes in its attempt to get a hold of inflation – raising interest rates 375 bps YTD. Other central banks are starting to catch up as we saw with the Bank of England raising rates from 2.25% to 3.00% in November and the ECB raising by almost 200 bps YTD (from a zero-bound).
Remember, nothing happens in a vacuum.
And this is why we have an international asset allocation–or an allocation in any other consistently underperforming asset class.
Because the collective research we do across all asset classes informs every investment we make–from direct investments in early stage companies like alwaysai, Iridia and Clear Street to the publicly traded companies in our small cap, all cap, dividend, global growth, and international strategies.
And it is why we believe this might be international’s turn to shine.
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.