International Equities are Looking More Attractive to Investors
We believe that the prospects for continued economic growth, as measured by gross domestic product (GDP), in the U.S. in 2015 are strong but remain skeptical about the ability of the U.S. economy to exceed 3% annualized GDP growth this year. We are not alone in this assessment as the consensus forecast for 2015 GDP growth, according to The Conference Board Global Economic Outlook 2015, is 2.9% (see table below).
Please note: Growth of GDP forecasts were sourced from The Conference Board, Global Economic Outlook 2015. Europe includes 27 members of the European Union (excluding Croatia) as well as Switzerland and Norway. Other Advanced Economies include Australia, Canada, Iceland, Israel, Hong Kong, South Korea, New Zealand, Singapore and Taiwan Province of China. YTD Stock Market Returns as provided by Bloomberg as of March 31, 2015. YTD Stock Markets Returns (USD) were based on the following representative indexes: United States – S&P 500 Index, Europe – EURO STOXX 50 Index, Japan – Nikkei 225 Index, China –Shanghai Stock Exchange Composite Index , India –National Stock Exchange CNX Nifty Index , Latin America – MSCI Emerging Markets Latin America Index, Emerging Markets – MSCI Emerging Markets Index. Past performance is not an indication of future results.
We are not as optimistic about the potential for economic growth in other places across the globe in 2015 as we are with the U.S. In particular, we believe that Europe’s economic recovery struggles will continue and that they will be plagued by persistent debt issues in some of the larger Eurozone economies in countries such as Italy and France in addition to the likely departure of Greece from the Eurozone. As the year progresses, we believe that the Eurozone will start to show signs of regaining its economic footing, thanks in part to continued stimulus measures likely to be enacted by Mario Draghi, president of the European Central Bank (ECB), to build upon in 2016.
Looking at another developed country, Japan will be an interesting story to follow for the balance of 2015 as some believe that Japan is poised to experience upside growth in its markets due to the accommodative stance of the Bank of Japan, strong earnings and the recent decision to increase allocations to Japanese stocks within the country’s pension fund. Others, including us at Hennion & Walsh, are taking more of a “wait and see approach” with respect to Japan until the market’s confidence in current Prime Minister Shinzo Abe’s economic policies, often referred to as “Abenomics”, increases.
Looking beyond 2015, both Europe and Japan are projected to grow their economies at a higher rate of annual growth while the U.S. is projected to experience lower annualized GDP growth. Perhaps their respective stock market returns will follow-up suit. If this is the case, investors should likely consider beginning to add allocations to certain international developed market equities in 2015. Investors apparently share this attraction to international equities as well thus far in 2015 based on the Exchange-traded Fund (ETF) flow data in the chart below provided by Cantor Fitzgerald as of April 2015.
In terms of emerging markets, China and India’s economies, while gaining in overall relative % of worldwide GDP, are expected to contract between the years of 2015 and 2019. With this said, both economies are forecasted to experience annualized GDP growth rates of 5.5% over this timeframe – well above the other developed market economies listed in the chart above, as well as Emerging Markets in general. It is important to remember that China plays an important role in global economic growth and market perceptions around their growth often feed into investors’ views on emerging markets in general. We believe that more progress is needed with respect to the U.S. economic recovery and actual progress is needed with respect to the economic recovery in the Eurozone for emerging market countries overall to benefit.
Overall, we contend that international stocks, particularly within Europe and also including certain emerging markets, are an attractive asset class for the intermediate-longer term. However, we still also expect the U.S. stock market to continue upon its secular bull market run over the short-intermediate term.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program consistent with the investment theme discussed in this article. This post is for educational purposes only and should not be considered as a solicitation to purchase or sell any of the securities or investment themes mentioned. International investments have their own unique set of risks that should be understood before considering an investment. As a reminder, all investment decisions in our view should be made consistent with an investor’s financial goals, tolerance for risk and investment timeframe.