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International stocks in a COVID world

The virus disrupted globalization but global stocks still offer opportunities.

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Key takeaways

  • The COVID pandemic has disrupted global supply chains, trade relationships, and the free movement of people.
  • Despite those disruptions, international stocks may offer US investors attractive potential returns and portfolio diversification.
  • International stocks are forecast to outperform US stocks over the next 20 years.
  • Professional management may help US investors gain the potential benefits of international stock investing while managing the risks.

Eighteen months ago, most of the world's countries shut down in the face of COVID-19 and it looked like the end of the long march toward a globalized economy in which people, products, and capital crossed seemingly notional borders. The number of people traveling between countries fell by 74%, trade dropped faster than during the Great Depression, and global supply chains seized up. But now, international trade, capital, and information flows all have returned to, or even surpassed pre-COVID levels (travel isn't expected to fully recover until 2023). That globalized recovery may contain opportunities for investors who are willing to look beyond their own country's borders

Even with COVID persisting, Fidelity's Asset Allocation Research Team expects international stocks to outperform US stocks over the next two decades. Those expectations partly reflect the fact that US stocks have bounced back further than other countries from last year's shutdowns and US stock valuations are now high by historical standards. The strong performance of US stocks reflects the liquidity injected into the financial system by the Federal Reserve. While other governments have also used spending and low rates to aid their recoveries, their markets have risen less so far. With these expectations in mind, many international stocks represent relative bargains, which suggests they may offer opportunities for attractive returns as well as providing diversification for US investors' portfolios.

Developed markets

Developed market (DM) countries, such as those in Europe, face long-term challenges from aging populations and high levels of debt. However, they are also recovering more quickly from COVID-inspired contraction than some emerging markets. The World Bank expects 90% of DM economies to regain their pre-pandemic per capita income levels by 2022.

Sam Chamovitz manages Fidelity® International Small Cap Fund (FISMX) and he's found opportunities in European markets such as the UK, Spain, and France. "If the Delta variant can be tamed, it could be just a matter of time before Europe fully opens their economies, unleashing pent-up demand for consumer discretionary goods, as well as certain industrial products. I've found non-US companies I think have big longer-term opportunities and attractive prices," he says. These include Adient (ADNT), an Irish maker of automotive seating, and Swedish technology company Dustin Group (DUSXF).

Bill Bower, manager of the Fidelity® Diversified International Fund (FDIVX) points out that developed markets also offer more than just lower stock prices than the US. “They're also home to high-quality companies with some unique investment ideas, like LVMH (LVMHF), probably one of the most unique and best luxury goods company in the world. There isn't anything like it. It's important to focus on high-quality companies that are world class, wherever they may be from,” he says.

Emerging markets

COVID continues to weigh on emerging-market (EM) economies with the World Bank predicting that only about one-third will have recovered to their pre-pandemic growth rates by next year. But some of the EMs who currently struggle with COVID also have the brightest hopes for future growth. Despite COVID, EM stocks are expected to be the best performing stocks over the next 20 years partly because many EMs have relatively young and growing populations whose incomes are rising as their economies grow. India, for example, already boasts a greater number of households with disposable income of more than $10,000 than does Japan. The growth of these domestic consumer markets is a key reason why Fidelity forecasts EMs to grow to comprise about half of global GDP in 20 years, compared with about 40% now and one-quarter 20 years ago.

Bower sees Asian bank stocks such as India's Kotak Mahindra and HDFC (HDB) as a good way to benefit from the expected long-term rise of emerging market consumers. “These are companies I think have the potential to consistently boost earnings and free cash flow, and offer exposure to growth trends and good value,” he says.

John Dance, manager of Fidelity® Emerging Markets Fund (FEMKX), says, “Investors are starting to turn their attention back to long-term opportunities regarding shifting global demographics and the opportunities they present in emerging markets. "EMs are increasingly the global growth engine and I'm seeking companies that take advantage of higher living standards and an expanding middle class." Dance says he held Mexican airport operator Grupo Aeroportuario del Centro Norte (OMAB) because he believed it could benefit as international airlines route more of their flights through Mexico due to a trade conflict between the US and China. He also keeps a close eye on India where COVID-related deaths surged earlier this year but vaccine supplies are rising. He believes Reliance Industries (RLNIY), India’s second largest telco and largest consumer retailer as well as an energy company, could see a rebound in demand for jet fuel when travel in India begins to increase.

Fidelity® International Small Cap Fund, Fidelity® Diversified International Fund, and Fidelity® Emerging Markets Fund held securities mentioned in this article as of their most recent holdings disclosures. For specific fund information, including holdings, please click on the fund trading symbols above.

Risks and reality

Emerging markets have been defined as places where the actions of government policymakers may matter to investors at least as much as the rising and falling of the business cycle. That has meant that investing in them involved greater political, social, economic, and regulatory risks than investing in more developed markets. But the ongoing recovery in developed and emerging economies alike is being determined by governments' management of everything from vaccine distribution to monetary and fiscal stimulus spending, so EMs and DMs now may resemble each other more in this respect than they used to.

While they no longer hold a monopoly on policy risk, EM stocks are still likely to be potentially more volatile and less liquid than stocks from developed markets. But because they have not historically moved in lockstep with developed markets, they can help diversify investors' portfolios to help manage risk. Of course, diversification and asset allocation do not ensure a profit or guarantee against loss. Investors should also keep in mind that the emerging markets category contains a wide variety of companies operating in very dissimilar countries. The countries that are grouped within the same emerging market indexes may present very different opportunities—and risks—to investors. This makes both careful security selection by experienced managers and diversification within portfolios important for spotting opportunity while avoiding undue risk.

Researching ideas

Those who want to invest outside the US can get professionally managed exposure through both mutual funds and ETFs. Fidelity has a number of tools to help investors research mutual funds and ETFs including the Mutual Fund and ETF evaluators 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® International Small Cap Fund (FISMX)
  • Fidelity® Emerging Markets Fund (FEMKX)

Non-Fidelity international funds

  • T. Rowe Price Global Stock Fund (PRGSX)
  • MFS Global New Discovery Fund Class (GLNAX)
  • Marsico Global Fund (MGLBX)
  • BlackRock Emerging Markets Fund (MDDCX)

The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

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