Study Abroad
The conversation around investment opportunities abroad has picked up over recent weeks, and deservedly so. A quick glance at major equity indices around the globe shows us that many are outperforming the S&P 500 year-to-date (YTD), and by a wide margin. In the interest of blog brevity, I’ll focus on two main areas in this piece: Europe and China. But that doesn’t negate the fact that there are also other countries with strong relative returns this year such as Mexico, Brazil, and South Korea to name a few. On a YTD basis, the S&P 500 is only up 4.2%, the Nasdaq is up 3.8%, and the Dow is up 4.7%. That’s actually quite healthy considering we’re only about two months into this year, but it pales in comparison to what European and Chinese markets have put up YTD.
It’s worth noting that this is a very short time period of outperformance compared to the past 17 years of European and Chinese stock underperformance and there have been false starts before.
The question investors have to ask themselves is the same one we’ve been asking about the U.S. economy for a few years: Is this time different?
And the next question is: Did we miss it or is this just the beginning?
Deciding to Buy
There are many things that go into a decision to invest in something, some of which are specific to each investor such as risk tolerance, time horizon, liquidity needs, and tax implications. Other things to consider are more specific to that investment such as its current valuation level, the economic and business environment, its exposure to certain sectors/themes/regions, all of which can inform an investor’s expectations for future returns. It’s well known that the U.S. economy is in better shape than most economies around the globe as shown in our labor market strength, healthy consumer spending, and decent business activity across multiple sectors. If we were looking at economic fundamentals alone, the U.S. still appears to be a better option. In fact, even if we look at earnings growth, the U.S. is still expected to outpace Europe and China for the next 12 months.
So why then, would investors consider allocating money to other regions if the major fundamentals still suggest the U.S. is stronger? Additionally, why have these regions done so well compared to the U.S. so far this year?
1. The earnings chart above is shown in U.S. dollar (USD) terms, and given the strength of the USD since late summer 2024, other currencies have weakened by comparison and pushed down relative earnings expectations. If there should be a reversal in USD strength - which there actually has been since mid-January - these earnings figures could change.
2. Toward the end of last year, as markets were trying to anticipate the policies of a new U.S. administration, a decent amount of skepticism and worry was priced into European and Chinese equity markets. So far this year, the tariff bark has been bigger than the bite, and these regions may be going through a relief rally to reprice their markets for a less painful Trump policy agenda than originally thought.
3. China has shown a willingness to stimulate its flailing economy and I believe it will continue to do so until things are in a more stable state. I wouldn’t bet against a Chinese government that’s committed to meeting its growth targets and maintaining its place in the world as a competitive economy.
4. Despite Europe’s economic woes, if there is a de-escalation in the Russia/Ukraine situation that opens it back up to Russian energy, the economies of many European countries could benefit. There is also a case to be made for an increase in European government spending as a result of potentially less U.S. funding support.
Cost Matters
A final element that can make Europe and China attractive right now is valuations. It’s no secret that U.S. stock indices are trading at high valuations compared to history, with investors getting more critical of the price they’re paying. Europe and China offer more compelling valuation levels according to their price-to-earnings (P/E) ratios versus the U.S.
Valuations are not a good timing mechanism, but they tend to be a solid tool in setting expectations for future returns. More specifically, the higher the valuation compared to history, the lower the future expected return. As investors search for attractive opportunities, valuations are playing a large role in the evaluation process.
Circling back to the question above of, “Did we miss it or is this just the beginning?” I believe these could be the early phases of a more durable trend upward for both regions. Currently, I am more bullish on China than Europe because of the differences among European countries and the difficulty of coordinating all of their economies into one healthy path forward. Nevertheless, the opportunity for upside exists.
As U.S.-based investors, our portfolios will likely always maintain a majority allocation to U.S. stocks. What this piece suggests is that after a couple years when many U.S. investors likely had a singular focus on domestic stocks, it may be time to step outside our comfort zones and give international markets a chance.
Want more insights from Liz? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.
Photo Credit: iStock/metamorworks
SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.
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