Harding Loevner: International Outperformance?
International equities are currently experiencing their longest period of underperformance relative to the U.S. stock market, explains Ian Wyatt, editor of Million Dollar Portfolio.
A report from Brandes Investment Partners says that underperformance has been underway for more than 100 months. The previous cycle of underperformance lasted 90 months, ending in December 2001.
Following that period of underperformance, international equities outperformed for the subsequent 78 months. What were the annualized returns? 11.2% for international, versus just 3.6% for U.S. stocks.
It stands to reason that international stocks will be in favor once again. And when that happens, we'll expect to see considerable outperformance.
Since the beginning of this year, international stocks have actually been outperforming. The following chart shows the performance of the MSCI EAFE (EFA) versus the S&P 500 (SPY). We think it's likely that this outperformance will continue for the next couple years.
Why has the U.S. dominated, while other developed nations have lagged? There are several reasons. First, the U.S. is thought to be one of the safest markets in the world.
Even with slow growth, America's vibrant technology sector has been booming. In times of uncertainty, investors decided to park their money in American stocks.