(SeekingAlpha) When a particular market is booming, even a mediocre company in such a market can deliver generous gains. Like Warren Buffett said: “A rising tide lifts all boats”. On the other hand, when a particular market is struggling, chances are that a large percentage of the stocks in such a market will tend to deliver disappointing returns, even the ones with strong fundamentals.
International stocks, both in emerging markets and developed markets, have significantly underperformed U.S. stocks over the past decade. This has produced a wide valuation difference, and international stocks are now massively cheaper than U.S. stocks.
Interestingly, the main trends seem to be reversing lately, with international stocks starting to produce better returns in recent months. In terms of both value and timing, it makes a lot of sense to consider a sizeable exposure to international stocks in the current environment.
International Stocks Are Massively Cheaper
Stock market returns are not only driven by fundamentals alone, but expectations and narratives can be powerful return drivers too. It’s important to keep in mind that these narratives and expectations tend to shift over time.
From 1999 to 2009, China was entering international markets, commodity prices were booming, and emerging markets were growing at full speed. In this context, both emerging market stocks and international stocks in developed markets outperformed U.S. stocks by a wide margin. Emerging markets gained 188%, developed markets gained 12%, and U.S. stocks declined by 9%.
But in the past decade, there was a major reversal in performance. The U.S. economy performed relatively better, and many of the most successful tech stocks listed in the U.S. produced spectacular returns.
At the same time, Europe has been hurt by the debt crisis, Brexit, and all kinds of political upheaval, while emerging markets have been under pressure due to currency volatility, low commodity prices, and the trade war. This has allowed U.S. stocks to massively outperform international markets since 2010.
Value and momentum are arguably the two most important return drivers to consider when investing. You want to buy cheap markets, and you also want to buy those cheap markets at the right time, meaning when they are starting to move in the right direction.
International stocks are much cheaper than U.S. stocks, and they are starting to outperform U.S. stocks lately. In plain English, both value and momentum are favoring international markets right now.