Paulo Whitaker/Reuters
Traders work on the main floor of the BM&F Bovespa stock exchange market in Sao Paulo, Brazil.
- By one measure, US stocks are outperforming the rest of the world at the most impressive rate in 18 years.
- This trend bolsters the case to find investing opportunities outside the US where valuations are cheaper, according to Niladri Mukherjee, the head of CIO portfolio strategy at Merrill Lynch.
- He detailed two markets outside the US that Merrill Lynch is bullish on long-term.
America's stock market is still unparalleled on the world stage more than a decade after the Great Recession.
Besides its size, its performance is surging ahead of the rest of the world in a way that hasn't been seen for nearly two decades. Proof of this can be found in the relative strength of the S&P 500 versus the MSCI World ex USA Index, which is surging at a rate not seen in the last 18 years, according to Bespoke Investment Group.
US stocks have outperformed the world since 2011, so this isn't a new trend. But the rate is accelerating amid a wide divergence from other countries, particularly in emerging markets. Economic woes from Turkey to Argentina, and more attractive interest rates in the US, are hitting EM hard; the MSCI Emerging Markets exchange-traded fund has dropped 11.5% this year.
Bespoke Investment Group
For investors in the game for the long haul, it's best to run straight into this fire, according to Niladri Mukherjee, the head of CIO portfolio strategy at Merrill Lynch.
"In your strategic long-term portfolios, you should always have international equities for diversification purposes and because our expected long-term returns from these international assets are more likely to be more than US equities," he told Business Insider on Wednesday.
For example, a portfolio with moderate risk and about half of its allocation in equities could place 7% of the non-US-stocks component in emerging markets, Mukherjee said. While the specific allocation vary by an individual investor's risk tolerance, Mukherjee and his team recommend "every individual" own a bit of EM for long-term growth.
Nobody likes EM anymore, so that's typically a contrarian indicator for EMs to bounce back."
The US is in its longest bull stretch on record, and has run up equity valuations to eye-popping levels, notably in areas like technology. Various emerging markets, on the other hand, are trading at "reasonable" and cheap valuations, which make them more attractive from a long-term perspective, Mukherjee said.
This by no means implies ditching US stocks.
"Even though the valuation argument is less in the favor of the US, the fundamentals are just too good," Mukherjee said. From corporate-earnings growth to the strongest quarter for the economy in nearly four years, investors have found few reasons to tank the US stock market for now.
However, Merrill Lynch shifted its rating on international developed markets from overweight to neutral earlier this year, recognizing the cheaper opportunities that abound elsewhere.
India is their favorite corner of EM long-term - a "secular overweight" according to Mukherjee. Its economy grew 8.2% in the second quarter, the fastest among G20 countries, and Merrill Lynch expects that India can grow at 7%+ rates for the foreseeable future, Mukherjee said.
More than half of Indians are under 25, and this younger population creates a "huge demographic dividend" that is paying up, he said.
Merrill Lynch is also bullish on China over the long-term, particularly its internet, consumer, and healthcare stocks.