I’m guessing most investors in the United States are extremely underweight international equities in their portfolios. This goes for retirement funds, college savings, etc. This has been a very successful strategy over the last eight years or so. US markets have had a wonderful run and doubled the return of their international peers over that time. However, this run of US outperformance may be coming to an end. See how the trend appears to be breaking below? This is one of the main reasons I’ve been aggressively increasing non-US exposure in my passively managed accounts.
From 2003 to 2008, international outperformed US equities by about 50%. Obviously, the allocations portfolios have between these areas can make a HUGE difference in the compounding of returns.
As those of you who follow me know, I typically post trade ideas that seem to be a good risk reward based on key technical levels. I don’t post much about portfolio management. It’s not as easy to do in 140 characters or less. Just chart setups. However, I wanted to share my thoughts on what I think could be the start of international markets outperforming US markets for many years to come. Here’s a few charts that further highlight this relative strength.
Here’s VEU (Vanguard All-World ex-US ETF) vs. SPY (SPDR S&P 500). These are similar to the indexes charted above but this is a shorter time frame and these are tradable ETFs. As you can see, international just recently broke out of this downtrend and it looks like a new trend may be forming with VEU outperforming SPY.
Here’s another look. This time it’s VGK (Vanguard FTSE Europe ETF) vs. SPY.
And again. Here’s EEM (iShares MSCI Emerging Markets) vs. SPY.
And one more for kicks. Even frontier markets want to beat the US. Here’s FM (iShares MSCI Frontier 100) vs. SPY showing what looks like a rounded bottom.
So based on all of the above, it looks to me like international equities are beginning to show some relative strength vs. the USA. As a technical trader, this is huge. Pair trades seem like good opportunities based on these charts but without getting too fancy this clearly suggests to examine portfolio allocations to non-US equities.
What makes me feel even better about moving away from the US in my slow-money / passively managed accounts is not only this relative strength but also fundamentals. Check out this great site I recently came across – http://www.starcapital.de/research/stockmarketvaluation. It ranks and gives great visuals for world markets based on various fundamental measures. Not surprisingly (to me at least) the US does not fare too well. In fact, we are near the bottom in just about every metric. What did surprise me is how well some of the better valued countries have performed this year so far. The combination of value and relative strength is impressive. Here’s a comparison of many of the top valued country ETFs along with SPY.
There’s a chance I could be totally wrong and the US markets will continue to outperform. However, I’ve seen enough to convince me that isn’t the highest probability going forward and am adjusting accordingly. What you do is up to you.