Will international stocks outperform US stocks?
Think long term. 2024 may be a good time to look for bargains in international stocks that have the long-term potential to deliver higher returns than US stocks. Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years.
Key Takeaways. U.S. stocks have outperformed global equities over the past 15 years, leading many investors to believe there is no good alternative. However, non-U.S. stocks may be attractive due to lower valuations, higher dividend yields and growth potential in select regions.
In essence, the U.S. has not been as expensive as perceived, and the rest of the world has not been as cheap. That may be the case again in 2024. Therefore, a strategy that includes U.S. and international stocks may continue to outperform one that excludes U.S. equities, even though non-U.S. markets appear cheaper.
Advantages of International Diversification
International stocks offer U.S. investors diversification, reducing reliance on domestic markets and potentially enhancing returns.
Despite lagging in recent years, when you look historically: in the last 50 years, international stocks outperformed U.S. stocks in over 40% of all 10-year rolling time periods.
This has been influenced by the uncertain economic and political environment during the COVID-19 pandemic, where investors have paid a premium for the lower volatility and more stable, predictable returns offered by U.S. equities.
International stocks have two main advantages: diversification and the potential to perform better than U.S. stocks over certain periods. In the past, non-U.S. stocks have had relatively low correlations with their U.S. stock counterparts, leading to better risk-adjusted returns for a globally diversified portfolio.
Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years. Indeed, they expect even mature, developed markets such as Europe to outperform the US over that time.
| Stock | 2024 return through March 31 |
|---|---|
| MicroStrategy Inc. (MSTR) | 169.9% |
| SoundHound AI Inc. (SOUN) | 177.8% |
| Vera Therapeutics Inc. (VERA) | 180.4% |
| Avidity Biosciences Inc. (RNA) | 182% |
Start by allocating 15% to 20% of your equity portfolio to foreign stocks. That's the percentage I typically maintain in the Vanguard portfolios. It's meaningful enough to make a difference in your overall returns, but not so much that it will ruin your portfolio when foreign markets temporarily fall out of favor.
Should I invest in US or international?
Markets outside the United States don't always rise and fall at the same time as the domestic market, so owning pieces of both international and domestic securities can level out some of the volatility in your portfolio. This can spread out your portfolio's risk more than if you owned just domestic securities.
| Company Name | Ticker | Sector |
|---|---|---|
| InterContinental Hotels Group | IHG | Consumer Cyclical |
| Yum China Holdings | YUMC | Consumer Cyclical |
| Ambev | ABEV | Consumer Defensive |
| Anheuser-Busch InBev SA/NV | BUD | Consumer Defensive |
International shares can be a good investment as they offer diversification benefits, growth potential, and exposure to global economic trends. However, they also come with risks, such as currency fluctuations and geopolitical uncertainties, so it's essential to research and consider these factors before investing.
Dividend stocks from other parts of the world can help reduce your portfolio's overall risk. Orange, Enbridge, and Ambev are top companies that operate in many different countries and are based outside of the U.S. Their high payouts can provide you with some excellent recurring income.
International investing can be an effective way to diversify your equity holdings. While returns have lagged behind US markets, international ETFs provide diversification benefits as they tend to be less correlated to US equities.
Beating the S&P 500 consistently is no easy task, and most funds fail. One ETF that is focused on growth and value has achieved this feat. This fund also trades at a cheaper valuation than the S&P 500 right now.
However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds. Indeed, Vanguard's fund of funds, such as target date funds, follow this target.
| Fund | Ticker | Return % |
|---|---|---|
| Fidelity Global ex US Index | FSGGX | 7.20 |
| iShares Core MSCI Total International Stock ETF | IXUS | 7.29 |
| Vanguard FTSE All-World ex US ETF | VEU | 7,45 |
| Vanguard Total International Stock ETF | VXUS | 7.39 |
The main reasons to invest internationally are to capture higher expected returns and to diversify portfolios across a broader array of asset classes. This can lower the overall volatility of a portfolio and increase the likelihood of benefiting from the return premiums associated with different risk factors.
Both have the same expense ratio and similar dividend yield, so you should choose whichever one you prefer based on the fund's strategy. If you only want to own the biggest and safest companies, choose VOO. If you want broader exposure and more diversification, choose VTI.
Why do companies choose to invest in an international market?
Opening up to new target customer groups
Sometimes, companies have exhausted all the possibilities for growth in their native market. This is one of the main reasons why companies decide to enter a foreign market where they hope to expand their potential customer base.
International portfolios give you more diversification, let you access liquidity in other markets, and can help you reduce the risks of the market you invest in the most.
Global recovery is steady but slow and differs by region
Global inflation is forecast to decline steadily, from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies.
But things have been looking up, as the S&P 500 (^GSPC -0.22%) has surged by more than 33% since late 2022. While it's unclear whether prices will continue soaring, many people are hopeful that we're in the early stages of a new bull market. If that's the case, 2024 could be a great year for the stock market.
Global equity markets are likely to remain challenged in 2024 as the world transitions to a regime of higher trend inflation and interest rates. This transition could generate shifts in earnings growth expectations, triggering volatility.
