Weekly Update

A Case for International Markets

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Published August 28, 2020


The article below from Delta Investment points to the gathering economic and market strength internationally. As noted before, a broader market is a stronger market. The more sectors and markets participate in the market’s rise, the better. For now, our favored Nasdaq index (QQQ) continues to lead the way, powered by the FANGMA trade. Here are Delta’s observations:

“China and much of Western Europe seems to be well ahead of the United States in managing the prevalence of COVID-19 and in re-opening economically. In China, mall traffic is back to about 85% of pre-COVID levels and China domestic air travel is fully recovered. In Germany (EU’s largest economy), daily deaths from COVID-19 are averaging about 5 and new infections about 500 (population 83 million). In the U.S. (population 328 million), daily deaths are about 1,000 and new cases are about 44,000. Even population adjusted, Germany is well ahead of the U.S.

Foreign markets, especially emerging markets, are growing in importance. The newly updated Fortune 500 list of the 500 largest companies by revenue has more companies from China and Hong Kong than the U.S.

U.S. and China Fortune 500 Companies

Emerging market countries now have more than 10x the number of mobile phone subscriptions compared to the U.S. at 4.4 billion vs. 400 million. The global ubiquity of cell phones has expedited economic development in emerging markets. Ten years ago, 40% of emerging market economies were driven by commodities. Today, commodities represent only 10% while 55% is in service-based company models in the technology, consumer discretionary and communications sectors. These sectors mimic the S&P 500.

The price/earnings (P/E) multiple of the world stock market ex-U.S. is roughly 17x. This is more than 20% less expensive than the P/E of the U.S. market. Aggregate international dividend yields are 50% higher than the dividend yield of the S&P 500. According to the IMF World Economic Outlook, emerging markets are expected to account for 70% of global economic growth through 2025.

With many foreign countries leading on COVID-19 containment, we might expect to see recent strength in foreign stock markets. In the past three months, the Vanguard developed markets and emerging markets ETFs (VEA and VWO) have appreciated more than the S&P 500.

International Market Outperformance

German ZEW Investor Expectations

A weakening U.S. dollar is driving capital flows into foreign currencies which in turn, drive liquidity into foreign markets. The massive COVID-19 stimulus programs in the U.S. are taking U.S. sovereign debt/GDP ratios to levels similar to that of many emerging market countries. The number of emerging market countries with investment grade credit ratings has doubled over the past twenty years.

For most of the past decade, international markets substantially underperformed the S&P 500. As the world develops and becomes more universally technology driven, the rest-of-the-world may be the place to be.”

Market Update

Stocks kicked off the final week of August with a solid +1.0% gain as the FDA’s support for an emergency coronavirus treatment encouraged investors. Positive tones on trade issues with China supported stocks to a +0.4% rise Tuesday. A reshuffling of Dow Jones industrial Average components added further upward thrust to the market. Salesforce.com (CRM), Amgen (AMGN), and Honeywell (HON) will replace Pfizer (PFE), Exxon (XOM), and Raytheon (RTX) in the 30-stock market average lineup. Another strong day for stocks Wednesday with tech/consumer leaders blasting higher once more. Software provider Salesforce.com (CRM) followed up its new inclusion in the Dow Jones Industrial Average by posting a superlative earnings report. The stock leapt +25% on the day, leading the software sector as a whole to jump markedly higher. The Nasdaq 100 (QQQ) rose almost +2%. Fed Chairman Powell announced a shift in monetary policy toward less strict inflation guidelines Thursday. This speech soothed investor concerns that the Fed would feel pressure to address rising inflation by lifting interest rates. The Fed noted that they were more focused on reducing unemployment in the near-term, thus would not preemptively raise rates. Stocks made it a perfect 5-for-5 week with another gain Friday. The +0.7% lift came from sheer momentum of the stock market as there was little new information for investors to digest.

A strong week for stocks with the S&P 500 (SPY) rising +3.27%. The market index has posted seven straight winning days and only has losses three days for the entire month. It’s been quite a run. The Nasdaq 100 (QQQ) added +3.78%, while the small-cap Russell 2000 (IWM) index rose +1.62%, remaining well below its record high levels. The index’s more heavily-weighted finance and energy shares (and relatively light tech position) continue to hold the index back on a relative basis.

Warm wishes and until next week.