Foreign stocks are looking attractive

As published in the Minneapolis Star Tribune 5/13/2017.

The French presidential election that concluded last Sunday may not have offered the fireworks of, say, Donald Trump winning the White House, but sometimes the least dramatic outcome can be the most exciting for investors.

Emmanuel Macron’s win represents a measure of stability for Europe. Macron’s opponent Marine Le Pen had pledged to remove France from the European Union, a scenario that would have resulted in a “new E.U.” without two of Europe’s three largest economies.

Although there are more European elections to come, none carry the economic or symbolic weight of France. Even though Macron may not enter office with the parliamentary majority to pass new reforms, his victory eliminates the chance of a major fracturing of the European economy, at least in the near-term.

That bodes well for investors with exposure to international equities, which have outperformed U.S. stocks by a healthy margin this year. European equity benchmarks have gained roughly 15 percent so far in 2017, doubling the return of the S&P 500. The more commonly referenced MSCI EAFE Index, a combination of European and Asian stocks, is up about 13 percent this year.

That outperformance stands in stark contrast to the last three years. In U.S. dollar terms, U.S. stocks have gained roughly 25 percent in that time while both developed international and emerging market benchmarks are negative.

Much of that disparity has to do with currency movements, but differing approaches to economic stimulus are also at work. The Federal Reserve began increasing interest rates 18 months ago, while the European Central Bank dropped rates and ramped up asset purchasing programs.

On one hand, stimulus can be positive for equity prices. On the other, the need for intervention demonstrated weakness in Europe’s outlook.

Political uncertainty has fostered a general lack of investor confidence in Europe, especially since the Brexit vote in June 2016. But perhaps the French election will be the catalyst to change that.

Valuations for European stocks remain attractive. On a price-to-book basis, European equities are the cheapest they’ve been relative to the United States in 40 years. The momentum is building, currency headwinds have shifted and the latest political land mine has been avoided.

If you’ve been avoiding international stocks in your portfolio, now may be the time to take another look.

View the article here.