International Equities – Still a Smart Choice?

Thomas BalisApril 18, 2019


After a tough 2018, US equity markets posted a strong rally in the first quarter of 2019.  The S&P 500 Index (which tracks large companies in the US) gained over 13% for the quarter, largely erasing losses from late last year. Yet, outside the US, markets have not fared quite as well.  The MSCI EAFE Index (which tracks developed markets internationally) gained just under 10% for the first quarter, following a 2018 where it lost over 13%.  Further, the MSCI EM Index (which tracks emerging markets internationally) posted very similar numbers. Given last year’s steep losses, excessive volatility, and incessant news about trade tensions, does it still make sense to invest in the space?  While fearful investors may choose the simpler approach of just investing domestically, smarter, long term investors look at the data.  Let’s do so.

If we turn back the clock a bit further, the numbers are very different.  Many investors enjoyed heady gains in 2017, with the S&P 500 gaining over 21%.  Lost in the celebration for many was the fact that international developed markets gained 25%, and emerging markets gained 37%. Further, emerging markets have outperformed the US four of the last ten years.[i]

Since past performance never guarantees future results, we should also consider the current state of the global economy.  In its global outlook for 2019, Vanguard Research states, “Our analysis…leads us to conclude that continued expansion, albeit at a slower pace…is the most likely scenario for the global economy in 2019.”[ii]  An expected convergence of monetary policy also appears likely, with central bankers both at home and abroad either on pause or even easing monetary policy.  Such a convergence would traditionally weaken the US dollar, strengthening international returns.

In 2018, higher earnings growth in domestic companies impacted investor sentiment internationally, driving values (particularly P/E multiples) down abroad.  As US fiscal stimulus wears off in 2019, many asset managers are constructive in their 2019 international outlook. JP Morgan Chief Global Strategist David Kelley states, “In the long run, slowing growth in the U.S. and a rising trade deficit could cause the dollar to fall, amplifying the return on international equities. Conversely, we believe, despite some hiccups this year, that economic growth should remain strong in both developed and emerging economies over the next few years, boosting corporate earnings.”[iii]

So, how heavily should one invest in the space?  HFA invests 24% of our equity portfolios in international developed markets and 6% in international emerging markets, reflecting our conservative approach to investing. For comparison, Vanguard Total World Stock Index Fund (VTWIX) is 36% international developed markets and 8% international emerging markets.  A more tactical approach, such as JPMorgan Global Unconstrained Equity Fund (JMESX) is 33% international developed markets and 11% international emerging markets.[iv]

In closing, investors have experienced spectacular returns over the last decade due to a very strong bull market and a secular decline in interest rates.  Return projections for the next decade are more challenging, with the aforementioned Vanguard outlook anticipating a median 4.9% ten-year annualized nominal return. That number drops to 4.0% without ex-US equity, with higher volatility. Clearly, then, while the short term investor may feel better to avoid the space, the smart investor understands the importance of investing for the long term. Given the increased volatility that comes with being later in the economic cycle, investors “may want to revisit their long-term plan and remind themselves that ups and downs are part of investing for the long-term.”[v]  As always, feel free to reach out to our office for questions or to personally discuss your portfolio.


[i]  Performance data from Morningstar Direct for MSCI EM NR USD and S&P 500 TR USD
[ii] Vanguard economic and market outlook for 2019: Down but not out
[iii] 4Q 2018 JP Morgan Asset Management market and economic update
[iv] Portfolio data by region from Morningstar Direct as of 3/31/2019
[v] 2019 Global Outlook: Mind the Gap (Charles Schwab)

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