We continue to believe that threats of potentially prolonged trade wars have served as an emergency brake to a stock market that has been pressing on the gas pedal to try and move forward with a growing global economy serving as a tailwind. As progress is reported with respect to trade negotiations, as we saw recently between the U.S. and Mexico, we would anticipate this emergency brake to be gradually lifted and for constrained stock prices across the globe to begin to rise accordingly. To this end, international equities seem particularly compelling right now as they have lagged U.S. Equities thus far in 2018, despite their outperformance in 2017, and appear to us to be at (or near) an inflection point. Valuations, global economic growth forecasts and accommodative international central bank policies all provide upside possibilities for international stocks in our view. To better understand our viewpoint, we examine each of these driving factors below.
Valuations
When assessing the global equities market, we generally review the following representative benchmark indexes:
S&P 500 Index – The Standard and Poor’s (S&P) 500 Index is a float-adjusted market capitalization index, composed of 500 widely held common stocks, which is generally considered as being representative of the U.S. stock market.
MSCI EAFE Index – The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
MSCI EM (Emerging Markets) Index – The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
Looking at these representative benchmark indexes, international equities outperformed U.S. equities in 2017. This has not been the case thus far in 2018 and essentially has not been the case for the last 10 years as U.S. equities have been in a decade-long cycle of outperformance.
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