5 reasons investors should favor US stocks versus overseas stocks, Wall Street strategist says
- Investors should favor the US stock market over developed international markets, according to LPL Financial.
- In a note published on Tuesday, LPL strategist Jeff Buchbinder listed five reasons why investors should continue to keep a majority of their stock investments in US-based companies versus their overseas counterparts.
- Buchbinder said over the next 12 to 18 months, opportunities within the US stock market look "more attractive" than developed international stock markets, and investors looking for overseas exposure should focus on emerging markets and Japan.
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Investors should favor US stocks over their developed international counterparts over the next 12 to 18 months, according to a note published on Tuesday by LPL Financial.
The firm said that despite the recent outperformance of international stocks over US stocks, investors should remain focused on the long-term opportunities within the US market.
If investors are looking for overseas equity exposure, they should focus on emerging markets and Japan, LPL said. But the outlook isn't as rosy for developed international stocks, which is mostly comprised of European stocks.
Here are five reasons LPL is cautious on developed international stocks:
1. Weaker economic outlook. "We expect economies in Europe to contract more than the United States or Japan in 2020 due to the pandemic," said LPL. The firm observed that while Europe has done a better job than America in containing the virus, "the economic impact of lockdowns appears to be greater there, and its stimulus jolt has lagged that of the United States and Japan," according to LPL.
2. International markets are more value-oriented. "Until more signs of a durable economic recovery emerge globally, we are skeptical that value stocks can sustain a relative performance advantage over growth," LPL said. The firm noted that the developed international market index has only 8.2% in technology stocks versus 26% for the S&P 500. Investors in international markets have less exposure to the companies that are driving trends in ecommerce retail and digital media, which are both two areas well positioned for the pandemic, according to the note.
3. Performance continues to disappoint. "International equities have been unable to sustain relative outperformance compared with the United States for much of the past 10 years," LPL noted. The firm said until international stocks can "sustain strength for more than just a month here or there," they are likely to remain cautious.
4. Valuations are not good short-term timing tools. While investors often point to a low valuation as a reason to buy a stock, "valuations generally don't tell us much about the next year or two, so we would need more reasons to re-allocate from US equities to international," LPL explained. The firm did point out that lower valuations have often correlated with long-term returns, "suggesting strategic investors who are in it for the long haul may benefit from these allocations."
5. Structural concerns. "Post-crisis, deficits and populism may continue to weigh on investor sentiment, consumer spending, and capital investment for the Eurozone," LPL said. The firm is encouraged by the eurozone's fiscal response to COVID-19, but according to LPL, "more coordination will be needed to drive better returns across Europe."
LPL said upside risks to international equities include a coordinated global growth recovery, Japan surprising to the upside, and further US dollar weakness, which is a benefit for overseas stocks.
And while the firm said that emerging-market equities are better positioned than international stocks, there are still significant risks to emerging-market stocks, like Brazil's inability to contain COVID-19, US-China trade tensions, and political instability in several countries.