US investors hunt for gains in foreign stocks

Some US investors are looking abroad to capture better stock returns in the coming months, betting European and other international stocks hold more enticing valuations after a long period of US dominance.

US stocks have rebounded to start the year after a rough 2022, but still have lagged their international counterparts. Europe’s STOXX 600 index (.STOXX) has gained some 17% since the end of the third quarter, versus 11% for the US benchmark S&P 500. MSCI’s gauge of global stocks excluding the US has risen more than 20% over that time.

European stocks have benefited as a mild winter has so far helped the region avert a feared energy crisis, investors said. Moderating commodity prices have helped, as has the re-opening of China’s economy and a weaker dollar; some expect the strength to continue., reported Reuters.

“Relatively speaking, we have got more money now chasing better opportunities outside the U.S., which was not the case the last several years,” said Martin Schulz, head of the international equity group at Federated Hermes.

Federated Hermes said this week it is shifting from a “modestly bearish” view on stocks to a “modestly positive” one, entirely by adding to international markets.

US stocks have long held sway over international peers. The S&P 500 rose over 460% from lows during the great financial crisis in March 2009 through last year, compared with a 170% gain for Europe’s STOXX over that time.

That period largely coincided with rock-bottom interest rates, a backdrop that favored U.S. stock indexes which are far more heavily weighted in technology shares than stock gauges in Europe. The tech sector amounts to 26% of the S&P 500. The group is only about 7% in the STOXX 600, which is far more heavily geared toward financial and industrial shares.

But the playing field leveled dramatically over the last year, as central banks globally raised interest rates to fight inflation. Higher rates tend to particularly pressure the valuations of tech and other high growth stocks while potentially benefiting banks and other value shares heavily weighted in Europe.

“One of the secular elements that has helped US equities was unconventional monetary policies, and those have come to an end,” said Alessio de Longis, senior portfolio manager for Invesco Investment Solutions in New York.

The firm last month rotated more into international equities as it increased its overall stock exposure, de Longis said.