International stocks have lagged the US for a decade. Here's why a $1.1 trillion investment chief is betting on an epic comeback, and where he sees the best opportunities.
- International stocks are poised for a comeback versus their US counterparts after underperforming for 10 years, says Justin Thomson, a chief investment officer and portfolio manager at the $1.1 trillion asset manager T. Rowe Price.
- The international-stock fund that Thomson manages has outperformed its benchmark on a 10- and 15-year basis according to Morningstar.
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International stocks have lagged their US counterparts since January 2010 and provided subpar gains to investors who sat out the longest bull market on record.
But investors in non-US stocks are about to see a change in fortunes, according to Justin Thomson, the chief investment officer and lead manager of the international small-cap equity strategy at T. Rowe Price.
If you're wondering why you should take his word for it, consider that the International Discovery Fund he manages has outperformed its benchmark on a five-, 10-, and 15-year basis according to Morningstar.
"The cyclical conditions for international equities to outperform are present, particularly with emerging markets," Thomson said at a recent press briefing. "There are strong structural merits for investing in overseas markets."
Before diving into his bullish arguments, Thomson explained why the US' outperformance since the end of the 2008 financial crisis is not a fluke.
It is largely thanks to superior earnings growth, evidence of which can be seen in the massive outperformance of US growth stocks over so-called value stocks that are considered cheap.
By contrast, European companies experienced a spurt of earnings momentum in 2016 but disappointed for much of the decade, Thomson said.
Another setback for non-US stocks has been the underperformance of European financials.
Regulators stepped up their game after the credit crisis but inadvertently stifled the growth of banks. Higher capital requirements combined with low interest rates also did not help.
3 reasons to go international
Despite these roadblocks that have been firmly in place, Thomson sees more powerful structural forces that should lift non-US stocks in the decade ahead.
The first one involves the trade war somewhat ironically. While the yearlong dispute between the US and China has worsened the contraction in global manufacturing, it has also created opportunities for other nations to fill supply-chain gaps that opened up. For example, Brazil still was exporting high volumes of soybeans to China even this fall, during a season that normally coincides with massive US harvests.
Secondly, Thomson pointed out that the recent currency crises that gripped Argentina and Turkey did not spread across the emerging-market universe. In his view, this is a sign that EM has and continues to mature as an asset class.
And finally, non-US stocks simply are more attractive from a relative-valuation standpoint because they've appreciated less.
For investors who are wondering where to start looking for ideas, Thomson drooped two gems of wisdom: companies that return cash to shareholders constitute the winning trade, and the disposable-income trend in China is favorable to its stock market.
One of the reasons why the US has massively outperformed thus far is that companies have kept their shareholders happy by allocating a huge share of cash to buybacks and dividends.
"If you're a CEO and you want a high price-to-earnings ratio, you can see how paying out versus reinvesting capital bank into your business may be the winning ticket."
Besides the US, Switzerland and Australia are two of the countries where companies have jumped on this wagon and increased their valuations as a result.
And, even though China's economy is slowing, what really matters for earnings is disposable income, Thomson said. He sees demographics and real wages turning in favor of household income and subsequently, of corporate earnings.
He also pointed out that although China's economy is slowing, it's still on pace to grow its gross domestic product at around a 6% pace in inflation-adjusted terms this year.
For perspective, the growth increase is nearly the equivalent of creating Spain's entire economy in one year.