Henry Nicholls/Reuters
- Thornburg portfolio manager Emily Leveille say international equities will be more attractive than US stocks this year.
- International stock valuations are cheap relative to the US, and are more accurately priced, Leveille said.
- "We believe European stocks are already more accurately calibrated toward an economic slowdown."
While US equities have been a solid bet over the last decade, overseas markets could offer better value and even outperform their US peers this year, according to Emily Leveille, managing director and portfolio manager for Thornburg.
In a recent note, she broke down five reasons why international investments could be better positioned than those offered by US markets.
1. Comparing recession valuations
Foreign equities have traded at a discount to US stocks in recent years, and the pandemic helped widen that gap, Leveille explained. But with both Europe and the US teetering at the edge of a recession, it appears the former has more accurately priced in the possibility of a downturn.
"If the U.S. market indeed falls into recession this year (which we believe is a likely event) and equity prices contract further, the ex-post valuation disparity will have shown itself to be even wider," Leveille wrote.
Thornburg, Bloomberg
2. US Dollar strength could be waning
The dollar is coming off a banner year, climbing against almost every other major currency with almost a 20% gain from January up to September 2022.
But that strength may have peaked, and a reversal could loom as inflation eases and the Federal Reserve pumps the brakes on tightening monetary policy.
Not only that, but with China easing its zero-COVID policy, it reduces the need for the dollar as a safe-haven investment, Leveille pointed out, which could drag on the currency and ultimately benefit international companies.
3. Declining energy prices
With oil and natural gas dropping to levels last seen prior to Russia's invasion of Ukraine, the trend reflects both warmer winter temperatures as well as Europe's ability to pivot away from Russian energy, in Thornburg's view.
"We believe this remarkable turnaround in energy prices will be supportive of economies that are the biggest net importers of natural gas: not only European countries, but also Japan, South Korea, and China," Leveille wrote, adding that lower energy prices also alleviate drags on global economic growth.
4. China's reopening
The reemergence of China will be a net-positive for international markets because a massive number of households will begin participating once again in the world economy via luxury goods, travel, and other consumer discretionary spending.
"This could have very positive implications for certain segments of the world economy — in particular for European companies, which generally have stronger ties and more revenue exposure to China than do U.S. companies," Leveille said.
5. Markets are becoming less concentrated
Most of the last decades' stock gains have been concentrated in a relatively small handful of tech names. The so-called FAANG companies — Facebook (now Meta), Apple, Amazon, Netflix, Google (Alphabet) — comprised roughly 40% of the total US equity market last year, according to Thornburg calculations.
Compare that to international markets, and the overseas tech sector makes up 7% of European markets and 20% of emerging markets.
"This greatly reduces concentration risk," Leveille said, "and leaves more room for investors to uncover growth opportunities that may be unavailable in the United States."