Wall St Week Ahead-Investors expect international stocks to outperform U.S. in 2020
27/11/2019 12:00
By David Randall
NEW YORK, Nov 27 (Reuters) - Even though the U.S. stock
market continues a record-breaking rally that has sent the
benchmark S&P 500 index up nearly 25% for the year, investors
appear to be looking elsewhere for better values in the year
ahead.
World stock funds brought in $8.2 billion in investor
inflows over the last two weeks, breaking a losing streak that
dated back to early September, according to Investment Company
Institute data. U.S. equity funds, meanwhile, lost more than $10
billion in outflows over the last two weeks, extending a retreat
that has spanned seven of the last eight weeks.
The move into overseas stocks comes as economic fundamentals
appear to be improving in parts of Europe and Asia while U.S.
growth looks to be slowing, drawing money away from a market
that had been an outperfomer.
Even with the MSCI All World Country Index, which tracks
global equities, nearing record highs set in January, 2018, fund
managers and analysts say global stock markets still offer a
better chance to outperform U.S. stocks in the year ahead. The
cite significantly lower valuations after failing to keep pace
with the U.S. equity market for much of the last decade.
"We're starting to see a period where valuation is going to
be the driver for future returns," said David Marcus, chief
investment officer at Evermore Global Advisors. He has been
shifting more of his portfolio into European stocks such as
Belgium-based medical lab equipment maker Fagron NV FAGRO.BR
and French media giant Bollore SA BOLL.PA .
The forward price-to-earning ratio for the broad Stoxx 600
index, for instance, is 15.4, well below the 19.3 forward P/E of
the S&P 500, according to Refinitiv data.
Any narrowing of that large gap in valuations could be a
driver, even for companies that have strong stock performance
this year, said Thomas Banks, a portfolio manager for the
Federated International Small-Mid Company fund who has been
increasing his stake in European companies.
He remains bullish on companies such as London Stock
Exchange Group PLC LSE.L and Sweden-based casino game operator
Evolution Gaming Group AB EVOG.ST , both of which are already
up 50 percent for the year to date.
"Some of the higher valuations for U.S. shares has been
warranted because the U.S. had a much faster growth rate. But
going forward if there's a trade deal announced or an amicable
solution to Brexit, the divergent growth rates could converge
again" as U.S. growth slows, said Banks.
The U.S. economy grew at a 1.9% annual rate in the third
quarter, down from 3.1% during the first three months of the
year. The European Commission expects the economy in the euro
zone to expand at an annual rate of 1.2% over the course of
2020, defying market expectations that growth rates would
continue to fall from 4-year lows in 2018.
Germany, the euro zone's biggest economy, grew 0.1% in the
third quarter after contracting 0.2% in the previous three
months, easing fears that the bloc would fall into a recession.
Further declines in the U.S. growth rate will also likely
bring down the value of the dollar, which has hovered near
record highs and eaten into the returns of investing in overseas
markets, Banks said.
Danton Goei, portfolio manager of the Davis International
fund, said more attractive valuations are pushing him into Asian
stocks and multi-national companies that are positioned to
benefit from domestic consumption in India and China.
He is bullish on Chinese companies that are not highly
dependent on trade such as tech giant Tencent Holdings Ltd
0700.HK and for-profit educational company New Oriental
Education and Technology Group Inc EDU.N. .
"You can see that the trade war has had a very limited
impact on their businesses and yet valuations have come down a
lot because of the macro concerns. When you have very strong
businesses and their valuations are falling for unrelated
reasons, that appears like a good buying opportunity," Goei
said.
At the same time, he is adding to positions in companies
such as French aircraft engine maker Safran SA SAF.PA , which
he expects to benefit from growth in the Indian travel market as
more consumers enter the middle class. Shares of the company are
up 41% for the year to date, yet still trade near their lowest
price-to-earnings ratio over the last 12 months.
"The big difference in valuations obviously matters in terms
of your likelihood of outperforming in the future," he said.
(Reporting by David Randall; Editing by Alden Bentley and Dan
Grebler)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
((Wall St Week Ahead runs every Friday.
For the daily stock market report, please click .N ))