• Wealth Management

Time to Look Overseas?

So far this year, economic growth slowed in many foreign markets and strengthened in the U.S., but that situation could reverse later this year.

It has been a challenging year for investing in foreign markets. Economic growth has diverged between the U.S. and non-U.S. regions and equity markets have followed suit. 

It has been a challenging year for investing in foreign markets. Economic growth has diverged between the U.S. and non-U.S. regions and equity markets have followed suit. 

However, the conditions that led to weakness in international markets and strength in the U.S. could well reverse in the latter part of this year. 

In the U.S., the Federal Reserve is likely to keep raising interest rates, earnings growth is likely at a peak and market leadership in the tech and consumer discretionary sectors is looking vulnerable. In contrast, beyond U.S. shores, monetary policy remains loose, growth could be stabilizing and valuations appear more attractive.

Recent weakness in certain foreign markets can provide an opportunity to rebalance your portfolio and avoid being overexposed to late-cycle U.S. markets. Below are three regions I think could represent opportunities going forward:

Europe – Stocks may have sold off more than financial conditions warrant, creating some compelling opportunities.  I would look for high-quality, value-oriented Europe sectors with less U.S. exposure, such as financials, utilities and telecom.

Japan – Its labor market is seeing the most improvement in decades and business sentiment is up. Corporate profitability and earnings momentum are improving. These conditions may support growth and benefit equities.

Emerging Markets – The downturn in currencies and stocks may be overdone. China weakness seems overstated and a rebound once currency and headline fears abate may benefit emerging markets.  Stay with export-oriented emerging market countries that are less sensitive to dollar strengthening, such as Russia, Taiwan and Korea.

In 2017, global synchronized growth set the tone. This year a major global theme is divergence. While I expect divergence to continue, that doesn’t mean foreign markets will stay down and U.S. markets up. In fact, we may see the reverse.