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John Kinsellagh
John Kinsellagh
Articles (142) 

Volatile and Overpriced US Markets Prompt Some Investors to Look Overseas

As the long bull market peters out and the new climate of volatility takes hold, some investors look overseas for better value

April 16, 2018

After 10 years of consistent and historically unparalleled growth, there are signs the bull market may be cooling. The first quarter of the year was tumultuous and perhaps foreboding. The S&P 500 lost ground in the first three months of the year, its first quarterly loss since 2015. Bond markets were not spared either as years of stability under a near-zero interest rate environment have given way to price swings and uncertainty about the direction of the yield curve. 

After years of rising share prices, some investors are concerned the U.S. market is starting to look overpriced; that multiples may be a bit generous. Even though corporate earnings are projected to grow due to the new lower tax rates, are the current price-earnings ratios warranted?

“Yes, there are higher earnings expectations because tax cuts have given you a sugar high, but you’re paying quite dearly for those earnings in terms of the multiples attached to them,” Wouter Sturkenboom, senior investment strategist at Russell Investments in New York, said. “That is not the case in Europe, which has less of an inflation and interest-rate risk right now, and better valuations.”

As the 10-year rise in stock prices appears slated to taper and the prospect for continued gains weakens, the projected growth rates overseas look promising. All these factors have contributed to a massive outflow of assets from the U.S. into overseas markets.

The Investment Company Institute estimated that in the first quarter of this year, investors pulled a net $52.13 billion from long-term mutual funds and exchange-traded funds focused on U.S. stocks, while adding $80.02 billion to international stock funds. Investors are also looking for limited risk afforded by fixed-income vehicles, putting a net $74.30 billion in bond funds.

Additional projections make overseas exposure appealing. According to estimates from the International Monetary Fund, growth in developing countries is anticipated to grow 4.9% this year and 5% next year, up from 4.7% last year and 4.4% in 2016.

In light of the outlook for relative stability among the developing countries, investors infused $45 billion into emerging market stock funds during the first three months of the year, the most since 1996 according to EEPFR Global, a fund tracker.

Some caution against investing in emerging markets now because higher rates in the U.S. make fixed-income investments more attractive than the projected riskier returns in emerging markets. Although overseas funds lost ground along with their U.S. counterparts, two-year returns for emerging markets tell a different story.

The MSCI Emerging Markets Stock Index soared 44% over the past two years, while the Bloomberg Barclays Emerging Market Local Currency Government Bond Index climbed 15%.

In terms of the impact any U.S. trade war with China may have on emerging markets, the shares of many export-dependent countries have not reacted adversely due to the strong economic outlook for many emerging markets.

In light of recent turbulence in the U.S. markets and the likelihood for substantial further gains diminished, many investors are hedging their bets by readjusting their portfolios to take advantage of opportunities in the emerging and other foreign markets.

Disclosure: I have no positions in any of the securities referenced in this article.

About the author:

John Kinsellagh
John Kinsellagh is a freelance writer, former financial adviser and attorney specializing in civil litigation and securities law. He completed the Boston Security Analysts Society course on investment analysis and portfolio management.

He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community, and personal finance.

He is the author of "The Mainstream Media Democratic Party Complex" and "Election 2016," both available on Amazon. Follow him on Twitter @jkinsellagh.

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