- International stocks have lagged US stocks for nearly a decade, but that trend may be nearing its end.
- Foreign stocks are priced attractively compared with many US stocks.
- Corporate earnings growth for non-US companies is expected to increase in 2020 despite relatively slow global growth.
2019 was a good year for investors in the stocks of companies trading on exchanges outside the US. While US stocks as represented by the MSCI USA Total Return Index have outperformed international stocks as represented by the MSCI All Country World ex USA Total Return Index for nearly a decade, last year, markets in Russia, China, Switzerland, and Italy all delivered total returns (price gains plus dividends) that beat the S&P 500. Many other international markets delivered double-digit returns. Only Argentina finished the year with a loss
Now as 2020 begins, a number of our portfolio managers believe international could give US stocks a run for their money.
Global growth improving
Economic growth helps drive stock markets and global growth is expected to continue in 2020, although likely at a modest pace. Still, there are signs that things are no longer deteriorating. Many central banks around the world have cut interest rates to encourage growth. Meanwhile, measures of business confidence and manufacturing are improving in major European economies such as Germany and Italy, which might be poised for improvement from near-recession conditions.
International stock prices low relative to US
Bill Bower, portfolio manager of the Fidelity Diversified International® Fund (FDIVX), says several reasons make him believe international stocks may be more attractive than US stocks for the next year or two. "The first," he says, "is history." US stocks have outperformed the rest of the world for much of the past decade, but not over longer time periods. In fact, international stocks, represented by the MSCI All Country World ex USA Index, have handily outperformed the S&P 500® for most multiyear periods. "I think it's a matter of time before the longer-term trend wins out," says Bower. The second reason is that prices of international stocks are low relative to those of US stocks, according to Bower. Throughout 2019, price-to-earnings (P/E) ratios of US stocks remained above their long-term historical averages, dating back to 1926. Meanwhile, the P/E ratios of non-US developed-market stocks and emerging-market stocks remained well below their respective long-term average.
Prices look especially attractive for international value stocks, according to Alex Zavratsky, portfolio manager of Fidelity® International Value Fund (FIVLX). "Value stocks advanced more than their growth counterparts for much of 2019, and I think several cyclically oriented value stocks still look very cheap and represent good long-term opportunities." In addition, he says, doubts persist about companies such as European banks and automakers that face competition from US-based companies. Those doubts have brought their stocks' prices down and have created the potential for significant gains if the global economy grows more strongly than expected in 2020.
Earnings of foreign stocks poised to revive
Of course, low prices may not by themselves be a compelling reason to invest. A more fundamental reason for investors to be optimistic about international stocks in the year ahead has to do with corporate earnings, which could drive stock prices higher. Earnings growth has been declining for many non-US firms for the past several years while the US saw a surge in earnings due to corporate income tax cuts in 2017. In 2020, Fidelity's Asset Allocation Research Team expects earnings growth by both emerging market and developed market companies to recover and to pull even with those of US companies in the mid-single-digit range over the next 12 months.
Eyes on China
In 2020, as ever, China's economic performance and its trade relationships with the US and other countries will matter greatly for many international stock markets. In 2019, China's monetary and fiscal policies helped cushion the impact of a slowdown in manufacturing, though a fast recovery remains unlikely. Trade tensions between China and the US have also cast a shadow over the highly integrated global economy.
However, slow growth and trade tensions are only part of the investment landscape in China in 2020. "Innovation is driving a fundamental transformation of China's corporate sector and economy that is largely unencumbered by tariffs and concern about slowing economic growth," says Sam Polyak, portfolio manager of Fidelity® Emerging Markets Discovery Fund (FEDDX). "China has sold more electric vehicles in the past year than the rest of the world combined, China's mobile-payments market is 50 times larger than that of the US, and China owns 36% of the standard-essential patents for 5G—the newest wireless network standard—compared with just 14% for the US," Polyak says.
China also plays a key role in prospects for emerging market stock investors. China's voracious demand for raw materials such as oil, iron ore, and copper to build factories, ports, roads and even entire new cities drove growth in many emerging markets (EMs). That "commodity supercycle" of demand has largely ended, and China and EMs alike are restructuring their economies toward consumer spending.
Despite this changing environment, James Hayes, portfolio co-manager of Fidelity® Total Emerging Markets Fund (FTEMX) believes EM stocks may offer improving earnings growth and attractive valuations in 2020. James says that lower US interest rates and a stabilization of trade conflicts could prompt more investors to add exposure to EM stocks, raising share prices in the process.
To be sure, investing in emerging markets can involve greater risks than more developed markets, including greater social, economic, regulatory, and political uncertainties. These factors can make emerging market securities more volatile and potentially less liquid than securities issued in more developed markets. But because they have not historically moved in lockstep with developed markets, they can be an important part of a well-diversified portfolio.
Finding investment ideas
Investors who want exposure to international stocks should consider professionally managed mutual funds and ETFs. Fidelity has a number of tools to help investors screen through mutual funds and ETFs for research ideas. You can run screens yourself using the Mutual Fund or ETF screeners on Fidelity.com. Below are the results of some illustrative screens (these are not recommendations of Fidelity).
Fidelity international funds
- Fidelity® Diversified International Fund (FDIVX)
- Fidelity® International Capital Appreciation Fund (FIVFX)
- Fidelity® Worldwide Fund (FWWFX)
Fidelity emerging market funds
Non-Fidelity international funds
- T. Rowe Price Global Stock Fund (PRGSX)
- MFS Global New Discovery Fund Class (GLNAX)
- Marsico Global Fund (MGLBX)
Non-Fidelity emerging market funds
- American Beacon Frontier Markets (AGEPX)
- MainStay Candriam Emerging Markets (MGHAX)
- TCW Emerging Markets Income Fund (TGINX)