The U.S. stock market has been on fire this year. But will the torrid U.S. market cool off next year, as some analysts argue, as other countries’ markets heat up? If so, can Europe and emerging markets in Latin America, Southeast Asia, China and India pick up the global growth torch as U.S. markets slow?
Of course, prognostications of the U.S. stock market’s death have become an annual staple. And those who bet against the U.S. stock market over the last decade lost big. But nothing lasts forever, and individual investors need to ask: Should I reallocate my stock investments to include more foreign shares?
U.S. Stock Market: 10 Years Of Strength
As the accompanying chart shows, U.S. shares — using the S&P 500 vs. the MSCI All Countries Index (minus the U.S.) as a benchmark — far outperformed shares in the rest of the world over the last decade. U.S. shares grew 186%, compared with 50% for the rest of the world. In 2019 alone, as of December 27, U.S. shares rose 29% vs. 19% for the rest of the world.
But, as investment advisers like to say, “past performance is no guarantee of future returns.” Will the coming year be as good for U.S. investors as it has been? Or should investors and funds be reallocating assets to include more foreign stocks and bonds?
A consensus is building among major investment advisory and brokerage firms that the tide may shift in favor of international stocks in the coming year.
Vanguard, for instance, in late November issued the bold prediction that international stocks would outperform U.S. stocks over the next decade by 3 to 3.5 percentage points. The fund manager sees 4% average annual returns in the U.S. stock market during the 2020s, compared with 7% to 7.5% returns for international stocks.
“We expect lower (U.S.) returns in the next several years,” Greg Davis, Vanguard’s chief investment officer, said. Why? Davis cites two factors: (1) high current U.S. valuations after years of outperformance, and (2) Fed tightening, which he noted is farther along in the U.S. than in the rest of the world.
2020 A Turning Point Overseas?
Other analysts also expect better things from emerging markets, particularly Asia, in the future.
“My expectation is emerging markets will perform better,” Kristina Hooper, chief global market strategist at Invesco, told IBD. “The big question is when. It often can take time for a reversion to the mean.”
View Entire Financial Action Plan 2020 Special Report
Hooper believes Chinese equities, in particular, have been “beaten down unfairly” as two years of trade battles between the U.S. and China have taken a toll. With China’s central bank in stimulus mode and a phase-one U.S.-China trade agreement set to kick in, China’s economy will get a shot in the arm.
That should give markets in Thailand, Vietnam and Singapore boosts, as well, Hooper says.
Improving markets overseas is a recurring theme among analysts.
“We are expecting somewhat better growth overseas during 2020 than in 2019,” said economist and market strategist Ed Yardeni, founder of Yardeni Research. “The ‘peace dividend’ from the de-escalation of Trump’s trade wars should benefit global growth. So should yet another round of ultra-easy monetary policies from the major central banks.”
He added, “Stocks are cheap overseas compared to the U.S.”
Central Bank Easing Helps Emerging Markets
Importantly, so-called “quantitative tightening” by major central banks — in which the Fed and others slowly shrink their balance sheets by selling off tens of billions of dollars of bond holdings each month — is done. Those bond sales hurt emerging markets by sopping up dollar-based liquidity. Now, big central banks are cutting, not raising, rates.
Beyond The U.S. Stock market
OK, if not the U.S. stock market, where should investors go? There it gets a bit sticky. Risk is everywhere. The consensus is for a rebound in China and the rest of Asia, but the rest is still up in the air.
In Latin America, for instance, Bolivia, Chile, Peru and Ecuador have all experienced major rioting in the past year. Mexico benefits from the restoration of trade with the U.S. under the new USMCA trade deal, but it largely just restores the status quo. And U.S. tariffs on Brazilian and Argentine steel and aluminum will likely slow those economies considerably, as governments in both countries deal with increasingly angry voters.
Troubles In Asia?
Even Asia is no sure thing. Though Japan’s central bank has an “ultra-easy” monetary policy, the government imposed higher consumption taxes in October that have already slowed the economy.
South Korea, Taiwan, Thailand, Vietnam and Singapore will all benefit from the exodus of companies from post-trade-war China, but still aren’t ready to perform high-end technology manufacturing, as China can.
China itself faces a host of challenges, from a shrinking workforce, aging population, sliding GDP growth, the continued impact of President Trump’s tariffs on its goods, problems in dealing with the Hong Kong rebellion and growing criticism of its mistreatment of Muslim Uighurs in Xinjiang province.
India, a Deloitte research note last month laments, is beset by “excess idle production capacity, weakening corporate profits, and infrastructure bottlenecks (that) have slowed down investment in production facilities and hiring.” This year, India’s GDP growth will slip below 6% for the first time since 2012.
Finally, Europe and Britain will have a reckoning early in the year on Brexit. That follows the election of Tory Boris Johnson in December. The likelihood of trade friction — along with growing fiscal issues in the European Union as slow growth makes debts unpayable for some countries — means an improving regional economy is no slam dunk.
So while investors may want to broaden their horizons beyond the U.S. stock market, they should heed that age-old advice: “Look before you leap.”
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