Q2 Market Summary: International Stocks
Through June 30, the global markets (MSCI All Country World Index) are down 0.4%. They are 8.2% below their late-January peak.
Foreign stocks have disappointed after a stellar 2017. Concerns about the European Union, trade wars, and a stronger dollar have hurt international markets. Non-U.S. markets (MSCI All Country World Index ex-US) are down 5.3% on the year and 11.5% from their January peak. The U.S. market (S&P 500) is up 3.2%.
Our portfolios are globally diversified. As a result, we never capture the entirety of a single market’s returns, including in times of outperformance, e.g. the U.S. market over the last nine years. We cannot time the market.
We have written extensively about the importance and attractiveness of international stocks. Rather than reiterate our thoughts on diversification benefits, valuations, and the cyclicality of U.S. versus international stock returns, we will highlight a couple of charts that add to the discussion.
Remain Humble About the Future
The United States has been the leading economic power for all of our lives. Yet, it has not always been so and may not always be so.
The next chart from Credit Suisse shows the global stock market at the ends of the 19th century and last year.
The U.S.’s overwhelming dominance was unforeseeable in the 19th century, as was Japan becoming the second biggest market. The pie charts in a few decades, let alone in a century, are unlikely to look similar to today. Owning international stocks is a concession to the unknowability of the future.
The Global Equity Risk Premium
The equity risk premium is what an investor earns in excess of the risk-free rate of return. In other words, it measures how well investors are compensated for accepting the risk of owning stocks.
The chart on the next page shows the long-term equity risk premium in various markets. The average global premium over cash (“bills”) was 4.3%. In the U.S., it was 5.6%.
While the U.S. market was one of the stronger performers and the U.S. economy fared far better than any other country’s economy, a handful of foreign stock markets outperformed. Economics do not guarantee anything about the returns investors will receive.
Notice that the premium is fairly consistent across markets – spanning from 3% in Belgium to 6% in Japan. Also, in every market (except Portugal) stocks beat bonds and bonds beat cash. The same principle that rewards risk-taking here applies abroad.