International investing in 2021

Exploring markets beyond the US could reward careful investors.

Key Takeaways

  • International stocks may offer US investors attractive potential returns and portfolio diversification in 2021.
  • Emerging market stocks may benefit from both an economic recovery and a weak US dollar. 
  • International investing also may expose investors to a variety of risks.
  • Professional management may help US investors gain the potential benefits of international stock investing while managing the risks.

While media coverage may give the impression that the US is the center of everything from COVID cases, to political polarization, to a high-flying stock market, a world beyond the US exists too. As 2021 begins, the world’s other 192 countries are looking forward to COVID-19 vaccines and a global economic recovery which may yield both opportunities and risks for US investors. Those opportunities stem from stock prices that are relatively low compared with the US and a recovery that is more well established in some economies outside the US.

The risks stem mostly from the persistence and unknown potential trajectory of COVID-19 and from geopolitical uncertainty. An example: rising tensions between the US and an increasingly assertive China as well as between China and countries such as the UK, Australia, and Canada.

Those geopolitical risks have been brought home to US investors with the executive order that bars them from owning shares in Chinese companies that the Pentagon says aid China’s military and spy agencies. Here's more on what that means for investors.

But while risks exist, there may also be opportunities abroad in 2021. While the extraordinary—and mostly unexpected—events of 2020 underline the riskiness of making forecasts for the year ahead, many countries are recovering from an unprecedented global recession and some trends are emerging that may help investors set realistic expectations for 2021.

Though the COVID-19 pandemic continues, some economies, particularly in Asia, are showing signs of improvement. Meanwhile, some companies and industries have been impacted far less than others and their strengths could translate into rising stock prices as growth resumes.

Why international—and why now?

The strong recovery in US stocks since a massive sell-off in March 2020 reflects the abundance of liquidity injected into the financial system by the Federal Reserve. While many governments have adopted stimulus policies to battle the COVID-related recession, the effects on markets outside the US have been less pronounced. Many international stocks represent relative bargains, which suggests they may offer opportunities for attractive returns as well as providing diversification for US investors’ portfolios.

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. Price-to-earnings (P/E) ratios of US stocks are 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 are below their respective long-term average.

To be sure, though, while history may be on the side of international stocks, the future is not the past and the international order may operate differently as COVID recedes. The virus’s impact on transnational supply chains; the free movement of goods, people, and capital; trade policy and international law are all still evolving in ways that may have implications for investors.

Investors who recognize the diversification benefits of investing in international stocks should think carefully about the variegated nature of the opportunities lurking behind the label “international stocks.” Indeed, in 2021, it may be more useful to think of international investment opportunities as falling into 2 separate categories. emerging and developed market stocks. For investing ideas in each one, click on the tabs.

Emerging markets may re-emerge

Emerging markets (EM) have been defined as places where the whims of policymakers may matter at least as much as the rising and falling of the business cycle for investors. Investing in them can involve greater political, social, economic, and regulatory risks and uncertainties than more developed markets. These factors can make emerging market stocks more volatile and potentially less liquid than stocks from more developed markets. But because they have not historically moved in lockstep with developed markets, they can help diversify investors’ portfolios. Diversification and asset allocation do not ensure a profit or guarantee against loss.

EM tailwinds: valuations, growth, a weakening dollar

Jurrien Timmer, head of Global Macro at Fidelity believes 2021 could be a good time for EM stocks, partly because their prices are attractive as the year begins. “Stocks in developing countries trade at valuations that are only 0.61x the price-to-earnings ratio of the US, the lowest in almost 20 years,” he says.

Economic fundamentals may also favor EMs in 2021. China and many of the emerging market economies which are driven by trade with China have returned to positive growth led by a recovery in manufacturing and increased government stimulus spending. China’s path out of lockdown suggests that recovery for other emerging market economies is also likely to continue.

The strength of the US dollar is also important for emerging markets. When the dollar has been strong and the commodities that many EMs export have been cheap, they have suffered. When the dollar has been weak, though, EMs have historically thrived—and there are indications that the value of the dollar may stay relatively low in 2021. This combination of the weak dollar, historically low stock valuations, and a global economic recovery as the COVID-19 pandemic abates could make 2021 a year in which EM stocks thrive.

China leading the way

While US stock indexes have delivered higher returns than international indexes over the past decade, the best performing individual stocks have come from China. In 2021, China is simultaneously remaking its economy to emphasize consumer spending over export-oriented manufacturing, recovering from a pandemic, and exchanging its emerging market status for the cachet of a rising global power.

As the first victim of the no-longer-novel coronavirus, China is the major economy that has traveled farthest on the long march to recovery. Fidelity’s director of research Lisa Emsbo-Mattingly follows the Chinese economy closely. “They got COVID first and got out of it first,” she says. 2021 could be a year of ‘revenge spending’ where pent-up consumer demand drives faster economic growth.”

If vengeful consumption takes off in China in 2021, it could join other tailwinds propelling the economy. John Dance, portfolio manager of Fidelity® Emerging Markets Fund (FEMKX), sees both rising consumption and changing government policy creating opportunity for investors. He says long-term prospects for corporate earnings growth that fuels rising stocks is being driven by discretionary spending by a burgeoning consumer class.

Dance says Chinese stocks are also benefitting from the government’s increasing efforts to spur the growth of domestic companies that provide high-value services such as health care. The health care industry is at the center of the government’s “Made in China” 2025 strategic plan, which seeks to develop home-grown intellectual property in industries that have historically been dominated by western firms.

A variegated landscape

Investors should 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. Some emerging markets have, well, emerged more than others. For example, South Korea and Taiwan’s complex and highly diversified economies, sophisticated financial markets, and relatively transparent and effective governments today closely resemble those of developed markets.

Meanwhile, other EMs such as South Africa and Brazil have suffered from corruption and a trend toward politically motivated meddling in the management of companies.

This makes both careful security selection by experienced managers and diversification within portfolios important for spotting opportunity while avoiding undue risk. It also means opportunities may take unexpected forms. Latin America is not widely recognized as a hotbed of technology innovation, but Will Pruett, manager of Fidelity® Latin America Fund (FLATX), thinks that could change in coming years and create opportunity for investors. “No one should ignore the home-grown innovation taking place related to cloud computing, web services, and digital payments in Latin America—all of which I see as growth areas,” he says.

Pruett says Latin America’s tech economy—like other EMs—has benefited from an emerging middle class, high smartphone use, savvy entrepreneurs, available capital for investment, central bank policies that push for innovation, and consumers who embrace new products and services.

Sammy Simnegar, portfolio manager of Fidelity® International Capital Appreciation Fund (FIVFX) also says prospective investors should pay attention to the variegated nature of EMs. He sees the most attractive opportunities in countries such as India that have outgrown their previous roles as exporters and are growing robust consumer economies of their own. “Middle-class growth is fueling myriad long-term opportunities in emerging markets,” he says. He notes that India, for example, now 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.

Developed markets: Back to slow growth?

While emerging markets are expecting a return of strong growth when the COVID pandemic fades, big developed economies such as those in the EU and Japan still face ongoing challenges to their ability to grow because they have aging populations and high levels of debt.

In most big economies outside the US, such as Germany and Japan, growth in the labor force, in demand, and in productivity is likely to remain low. These countries’ populations are aging and that reduces their chances of raising economic growth.

In the absence of traditional drivers of growth, financial market returns in these countries are likely to be driven increasingly by fiscal and monetary policies which themselves face political uncertainty. Against that backdrop, the potential for volatility is likely to remain high and portfolio diversification—across geographies as well as asset classes—will be important.

Spotlight on software

Sammy Simnegar, portfolio manager of Fidelity® International Capital Appreciation Fund (FIVFX) says he’s finding opportunities in these slow-growing economies by focusing on software makers that cater to businesses in just a few industries or sectors. Over time, he thinks they are less likely to be displaced by outside challengers.

One such company is France-based Dassault Systemes (DASTY), a leader in 3D simulation and product-lifecycle management, with a focus on the auto and health care markets, among others. Simnegar says the company’s 3DEXPERIENCE platform enables customers to design and test consumer experiences from idea to market delivery and usage before actually producing them, resulting in better consumer offerings that take less time to develop.

Simnegar sees opportunity in Toronto-based Constellation Software (CNSWF). He says the firm is an acquirer of industry-specific niche software businesses and believes the company has an excellent management team with a track record of successfully integrating acquisitions.

He also sees opportunity in UK-based Aveva Group (AVVYY), which he considers a leader in CAD-CAM (computer-aided design and computer-aided manufacturing) software and related products.

A rebound in leisure stocks?

Sam Chamovitz, portfolio manager of Fidelity® International Small Cap Fund (FISMX) also sees opportunities in slow-growing developed markets. “No one can be sure about the timing of an upswing, but I do feel optimistic about the economy and I think some of the well-run companies in this segment have the potential to snap back quickly in a recovery. Once developed economies fully reopen, there could be pent-up demand for leisure activities.” For this reason, Chamovitz likes the leisure segment, which includes restaurants such as Wetherspoon (JDWPY), a UK-based pub and restaurant chain that owns the majority of its real estate, and Marr, a leading food distribution company in Italy that has large exposure to the travel industry.

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

Finding ideas

The extraordinary—and mostly unexpected—events of 2020 underline the riskiness of making forecasts for 2021, but also the riskiness of not being ready for whatever may come. With that in mind, maintaining a well-diversified portfolio of stocks and bonds may be as important as ever to help you reach your goals, and diversifying across geographies can help you do that.

Those who want to invest outside the US can get professionally managed exposure through both passive and active investment funds. Actively managed funds that practice rigorous research can potentially help you gain exposure to industries, companies, and geographies that offer opportunity while avoiding those that don’t.

Whatever your international investing goals, professionally managed mutual funds or separately managed accounts can help you. You can run screens using the Mutual Fund Evaluator on Fidelity.com. 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 emerging market funds

Non-Fidelity international funds

Non-Fidelity emerging market funds


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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