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Although international equities have lagged domestic stocks over the past decade, valuations indicate a reversal to that recent trend is probable in the coming years.

 International PE2

Domestic equities have outperformed international equities by a large margin since the global financial crisis. Over the past decade ended September 30, the annualized return of the MSCI USA Index was 11.3%, while the MSCI EAFE Index (representing 21 developed markets outside the U.S. and Canada) returned just 5.4% annualized during the same period. This begs the question, “Why invest in international stocks when domestic stocks have outperformed by such a wide margin?”

One of the most compelling arguments for international equities in recent years has been relative valuations, which increasingly favor international markets over domestic equities today. Over long-term periods, valuations have been a strong predictor of returns, as illustrated by the chart above. At current valuation levels, international stocks have historically posted average annualized returns greater than 12% over the ensuing decade, while the average returns of U.S. equities at current valuations have been much lower. Of course, the potential range of returns is wide, but a favorable valuation tailwind clearly favors foreign markets.

Over shorter periods, the impact of momentum can be significant, making valuations virtually meaningless in predicting near-term return potential. Over the long-term, however, valuations matter a great deal. Buying assets that are out of favor tends to pay off over time. Chasing today’s best performers does not.

Disclosures

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.