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International
opportunities
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Nationwide Market InsightsSM
Markets look abroad for opportunities.
International stocks have displayed rare underperformance relative to U.S. stocks in the current bull market.
Some of this underperformance has been justified, based on stronger economic growth in the U.S. compared
with major developed markets in Europe and Japan. This trend has shifted in the early months of 2017, with
international stocks outpacing U.S. markets year-to-date. The improving outlook may create opportunities
for investors who want to seek returns beyond U.S. borders.
International equity valuations currently appear
more attractive relative to the U.S.
Economic growth in other parts of the world is
converging with the U.S.
Resolution of political uncertainties should help
investors refocus on improving fundamentals
International
equity valuations
currently appear
more attractive
relative to the U.S.
• The equity performance gap has been extreme throughout most of the current bull market, with U.S. stocks
substantially outperforming international stocks.
– In previous bull markets, international stocks have tended to outperform U.S. domestic stocks. (See chart
1 below.)
– Performance in emerging equity markets has been even weaker than U.S. stocks since the end of the 2008
financial crisis and market downturn.
• The strong performance of U.S. stocks has elevated valuations, while developed and emerging markets
appear currently poised to offer better opportunities for potential returns at fairer valuations. (See chart
2 below.)
Chart 1: Annualized changes in the S&P 500 and
MSCI EAFE index across bull markets
Chart 2: Price-to-book ratio of U.S. stocks vs. developed and emerging international markets
March 2007 — March 2017
Price/Book ratio of U.S. stocks vs. developed and emerging international markets
March 2007-March 2017
3.0
S&P 500
2.86
MSCI EAFE Index (Developed Markets)
MSCI Emerging Markets Index
2.5
2.0
1.58
1.5
1.46
1.0
S&P 500
MSCI EAFE
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Source: FactSet Research
Source: Bloomberg
Capital market insights | 2
Mar-16
Mar-17
Economic growth
in other parts
of the world is
converging with
the U.S.
• The U.S. is farther along in the expansionary business cycle than other parts of the world, but as the U.S.
economic expansion ages, international economies have room to catch up and offer better opportunities for
stronger growth.
– A good example can be seen in emerging markets, which have historically faster rates of GDP growth
than developed markets; this rate grew at a faster pace in 2016 than the year prior. (See chart 3 below.)
• Recent strength in the U.S. dollar relative to other major currencies has encouraged growth in international
economies.
– A stronger dollar makes U.S. goods more expensive than foreign-made products, creating advantages for
international firms and economies.
• While the Federal Reserve has already started tightening U.S. monetary policy, central banks in Europe and
Japan remain accommodative with low and negative short-term rates and ongoing “quantitative easing”
asset-purchase programs.
Chart 3: Spread in yearly real GDP growth between emerging markets and developed markets
Percent
Source: Global Insight
Capital market insights | 3
Resolution
of political
uncertainties
should help
investors refocus
on improving
fundamentals.
• “Brexit” has officially begun in the U.K., but the market’s lackluster response to the formal start of Britain’s
divorce from the European Union (E.U.) shows investors have tempered their expectations about the
potential repercussions.
– U.K. economic data and consumer confidence have been resilient in the nine months since the “Brexit”
vote, contrary to the gloomy predictions for the British economy made after the referendum’s result. (See
Chart 4 below.)
• The next potentially disruptive event on the political horizon is the French presidential election, beginning
later this month, where the pro-E.U. and pro-euro candidate remains competitive in the latest polls.
– German elections later this year also have the potential to produce surprise wins for populist politicians,
although there are signs that anti-E.U. sentiment in Europe may be peaking.
• Similar to the U.S. market reaction to Donald Trump’s presidential election victory, the resolution of
uncertainty once these events pass may remove many of the distractions that have been clouding the
investment outlook and allow investors to focus on the fundamentals of improving economic performance.
Chart 4: European Union consumer confidence
March 2007 — March 2017
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Source: European Commission
Capital market insights | 4
Key takeaways
International markets appear ready to catch up to the U.S., both in terms of economic growth and stock performance.
Developed and emerging market international stocks have been uncharacteristically weak in the current bull market. But with
U.S. stock markets flirting with overvalued levels as of late, international stocks may offer better opportunities for potential
returns at fairer valuations. As more of the political uncertainty dissipates, especially in Europe, international investors can
begin to focus on the economic fundamentals in these markets.
• Consider adding international stocks to your equity allocation as suitable for your risk profile, or review your international
allocation if you’re already investing overseas.
• While broad international exposure can offer potential growth, active management in international stock markets may
provide opportunities to outperform indexes.
• Follow upcoming political events in Europe and other countries with an impartial eye and avoid making emotional
investment decisions in reaction to news headlines.
For more help or information, contact your financial advisor.
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Market index performance is provided by a third-party source Nationwide deems to be reliable. Indexes are unmanaged and have been provided for comparison purposes only. No fees
or expenses have been reflected. Individuals cannot invest directly in an index.
MSCI EAFE® Index: An unmanaged, free float-adjusted, market capitalization-weighted index that is designed to measure the performance of large-cap and mid-cap stocks in developed
markets as determined by MSCI; excludes the United States and Canada.
S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities
market and those companies’ stock price performance.
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