The economic issues plaguing Turkey have snowballed into a bigger financial crisis this month, triggered when President Donald Trump doubled tariffs on Turkish steel and aluminum. Turkey’s currency (the lira) and stock market both fell precipitously. The investment world now fears Turkey’s troubles could spread.
The MSCI Emerging Markets Index has fallen roughly 7 percent since the end of July. Non-U.S. Developed Markets have fallen more than 5 percent in that time. The S&P 500, meanwhile, has remained steady. If you make your investment decisions based on past performance (and most people do), international stocks are probably the last thing you’re interested in owning.
That said, there are legitimate reasons to buck the trend.
First, if you’re like most Americans, you already have significantly less international exposure than U.S. in your portfolio. That’s mostly because of familiarity bias. Based on market capitalization, however, the U.S. stock market comprises only 42 percent of the global economy. So, unless half of your stock exposure is already in non-U.S. equities, you’re “underweight” international.
Second, long-term growth is more robust in emerging markets. That often comes with higher volatility, but countries with faster-growing economies provide attractive long-term returns. You want exposure to that growth.
Third, international stocks have underperformed U.S. equities for a decade. In the past 10 years, non-U.S. Developed Markets (the MSCI EAFE Index) have returned 3.4 percent per year on average. Over the same time, the S&P 500 has averaged annual gains of 10.6 percent. Historically, this relative performance has been cyclical. It’s only a matter of time before the current trend reverses.
Fourth, the dollar has strengthened, partly because of the expectation that a global trade war is disproportionately worse for other countries than for the U.S. If tariffs do not remain in place long-term, a weakened dollar could provide a tailwind to non-U.S. stocks.
Finally, international stock valuations appear much more attractive than large-cap U.S. companies, which trade at P/E multiples well above historical averages.
It’s true that the U.S. economy is experiencing impressive growth, perhaps justifying the S&P’s current valuations. But it sure feels like the outlook on international equities has moved from concern to panic, and when that happens it’s usually an attractive time to increase exposure.