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Global outlook 2024: More risk, maybe more reward

Key takeaways

  • Many countries' economies may slow more than that of the US in 2024, but their long-term growth prospects remain brighter.
  • Wars, rising nationalism, and the legacy of the COVID pandemic are all helping to slow globalization which lifted international markets over the past 30 years.
  • Despite these short-term obstacles, Fidelity research points to international stocks potentially outperforming US stocks over the next 20 years.
  • In 2024, professional managers may identify mispriced stocks of high-quality non-US companies while also managing the risks of investing globally.

Why bother with international investing?

For much of the past decade, US stocks have appeared to offer a combination of attractive yields, manageable risks, and the comfort provided by familiar names. That’s been so attractive that it’s been tempting for US investors to look away from the rest of the world.

But overlooking international investing also means overlooking the possibility that stocks of companies from countries with better long-term prospects than the US could present compelling buying opportunities in 2024. And for those looking to take advantage of potential opportunities, it could mean higher returns and greater diversification in the future. As with any investment, though, investing in international stocks requires an understanding of the factors that drive markets and create risks and opportunities.

The big picture

Since the cold war ended in 1991, the economies of most countries around the world have grown more closely linked. Imports and exports have increased, jobs have been moved to lower-wage countries, stock prices of multi-national companies have risen, and inflation has been held down. Over the past 3 years, though, increasing nationalism, policies intended to slow the spread of the COVID virus and the push to punish Russia for invading Ukraine have slowed the long march toward the creation of a truly global economy and global markets where US companies and investors can seek opportunities anywhere in the world.

In 2024, the globalized economy is likely to face further challenges ranging from wars to persistent inflation to the increasing rivalry between China and other major countries. However, none of that is reason for US investors to turn their backs on the rest of the world in the new year. The ebbing of what had been the rising tide of globalization does not mean the end of opportunities outside the US; instead it may mean that those opportunities take somewhat unexpected forms and that careful research matters more than ever.

A pleasant surprise from Japan

One of the most remarkable good news stories for international investors over the past year has been the return to life of Japan's stock market. For 3 decades, the world's 4th largest economy has been stagnant with little to offer investors except a cautionary example of why deflation is not something to take lightly. In 2023, though, a combination of reforms by markets, regulators, and companies and a rebirth of consumer spending shook Japan out of its slumber and made it one of the best performing stock markets in the world last year.

Japan still faces a future of slow growth and an aging population so whether it can sustain that momentum in 2024 is uncertain. What the story of its revival suggests, though, is that the unique circumstances of individual countries, companies, and governments—rather than international trends—may matter more for prosperity in a less global future.

Think long term

2024 may be a good time to look for bargains in international stocks that have the long-term potential to deliver higher returns than US stocks. Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years. Indeed, they expect even mature, developed markets such as Europe to outperform the US over that time.

Those forecasts reflect the expectation that spending by consumers in emerging market (EM) countries will be a major source of economic growth and profits for companies over the next 20 years. EM stocks are estimated to be some of the best-performing stocks over that time partly because many EMs have relatively young and growing populations whose incomes will rise 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's Asset Allocation Research Team forecasts that EMs will grow to comprise about half of global gross domestic product in 20 years, compared with about 40% now and 25% 20 years ago.

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Short-term headwinds

Though international stocks may be attractive in the long term, many countries face high inflation and economic downturns as 2024 begins. Geopolitical tensions are also increasing. These include the potential for a wider war in the Middle East, a cold war-style proxy war between NATO and Russia, and China's adoption of more assertively nationalistic policies. As Fidelity's Asset Allocation Research Team puts it, "A broad set of crosswinds is creating greater differentiation among countries."

One of those crosswinds is inflation. Higher prices reduce the ability of lower- and middle-income consumers to spend, which in turn lowers economic growth. While inflation has come down over the past year in some developed markets including the US, UK, and Japan, it is still rising in the Euro area overall and in important emerging markets such as India, Mexico, and Turkey. Inflation has pinched pocketbooks around the world, but it is especially painful for the less wealthy in emerging markets who may be forced to reduce spending.

EMs 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 today, developed market (DM) and EM economies alike are being shaped by governments' management of everything from monetary and fiscal policy to information technology regulation to relations with trading partners, 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 EM category contains a wide variety of companies operating in very dissimilar countries. The countries that are grouped within the same EM 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.

How to think about risk

Fidelity’s Asset Allocation Research Team analyzes political and policy risks as well as economic factors including interest rates, inflation, employment, and more. Their research shows that geopolitical crises have historically had significant impacts on financial markets if they also have sustained impact on major economies.

The most important thing for investors to consider about any geopolitical event is whether it has consequences for companies, economies, and financial markets. Investors shouldn’t obsess over every geopolitical event that happens; they now just need to consider the events as part of the landscape, like they would inflation risk, interest rate risk, or regulatory risk. Geopolitics probably didn't need to be a big part of the toolkit during the past few decades, but that period was very unique to world history. Now it’s probably over and investors are going to need to pay more attention to it.

A more positive consequence of the globalization of finance and commerce is that geopolitical events in one part of the world can now also create potential opportunities elsewhere that may not be easy to spot without rigorous research. For example, Russia is the source of nearly 50% of the energy consumed in Europe and the war in Ukraine and policy responses from the US and EU have disrupted its oil and gas exports. This predictably caused inflation in Europe, but it also created an opportunity for companies that operate oil and gas tankers. These companies’ stocks have been some of the best performers over the past year as their ships seek to meet the global demand for energy shipments that would previously have moved through pipelines in Russia and Ukraine.

Growth in advanced economies is expected to slow sharply in coming years.
Source: World Bank Global Economic Prospects report

Where and why to look for opportunities

At the start of 2024, many international stocks may offer opportunities for attractive returns as well as providing diversification for US investors' portfolios.

Bill Bower, manager of the Fidelity® Diversified International Fund (FDIVX), also is focused on finding high-quality companies that are being mispriced because of negative sentiment about the effects of geopolitical risk. "It's important to focus on high-quality companies that are world class, wherever they may be from," he says. DMs such as Europe offer lower stock prices than the US partly because European Union countries are suffering from higher inflation. But Bower says Europe offers more than just lower stock prices. "They're also home to high-quality companies with some unique investment ideas, like LVMH (LVMHF), which I believe is probably the most unique luxury goods company in the world," he says.

China: A story of its own

China is also in a different spot than most of the rest of the world due to its own policymakers' actions. Xiaoting Zhao, manager of Fidelity® Emerging Asia Fund (FSEAX), says that China's "first-in, first-out" experience with the initial wave of COVID put its economy on a different timetable than most others. China is emerging from a slowdown, and Zhao believes that its low rate of inflation provides policymakers more flexibility than those elsewhere to stimulate the economy with monetary and fiscal policy.

That commitment to stimulating growth creates opportunities to invest in Chinese companies during the early stage of an expansion, which is often a good time for stocks. The government's decision last year to end its policy of trying to control COVID through mass quarantines and economic shutdowns has also reduced risks for investors that China's recovery could stall.

As China's economy recovers and grows more sophisticated, Sam Polyak, manager of Fidelity® Series Emerging Markets Opportunities Fund (FEMSX), sees opportunities in disruptive and innovative companies there. He especially favors China-listed firms that are challenging well-known premium international brands. These companies include homegrown brands such as appliance maker Haier that have purchased familiar US brands, such as that of General Electric household appliances.

Some of China's high-tech disruptors face disruption of their own in 2024, however. Zhao expects large, internet-focused companies to face short-term challenges from heightened regulation. Still, he says, "I continue to be bullish on the outlook of China over the medium to long run."

Fidelity® Diversified International Fund, Fidelity® Series Emerging Markets Opportunities Fund, and Fidelity® Emerging Asia 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.

Growth in China is expected to slow dramatically this year.
World Bank Global Economic Prospects report

Old risks and new realities

The label "international stocks" is often applied to a widely variegated group of companies and countries that also face widely variegated prospects. In 2024, research and security selection, which are always important for international investors, will become even more so.

While history and currency may both be on the side of international stocks, the future is not the past and the international order may operate differently in this new era. Seemingly settled assumptions about 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. As new realities force changes to old assumptions, investment managers with strong fundamental research capabilities may be able to spot opportunities in the shifting landscape.

Researching ideas

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