Internationally-minded investors thought global
diversification would benefit them. So, in recent years,
investors placed nearly a trillion dollars of long-term assets
into global equity mutual funds.
Globally diversified investors put their largest concentration of
assets into broad global mutual funds that invest across all
non-U.S. regions (at around $500B).
Following this were Asia-focused funds (at around $300B).
Source: EPFR Global
However, instead of outperforming concentrated positions
tracking U.S. or German indexes, most international indexes and
mutual funds keep
Numerous regional and country share indexes have extended a
streak of underperformance that stretches back to mid-2010.
Consider the MSCI Emerging Markets Index, tracked by the
iShares MSCI Emerging Markets Index Fund
). It fell -3% YTD versus a +17% rise for the
). That benchmark has hit a string of record closes in 2013. The
German DAX index
) is up nearly +12% YTD. It set an all-time high in May.
Four Fact Sets on Global Stock Underperformance
Three years of underperformance leaves emerging market stocks
trading at the biggest discount to developed-market stocks in
five years. Ponder these four fact sets:
(a) Many major emerging-market companies are more profitable and
less burdened with debt than developed-world counterparts. Think
Samsung and Hyundai.
(b) Consider the weak technical backdrop and future fate of
stagnant shares in Spanish banks
) offering a 4.6% dividend and
) offering an 8.6% dividend yield with broad exposure to Latin
(c) Take a look at regional and country MSCI 12-month
Price-to-Earnings equity valuations shown below.
table shows a current valuation opportunity of nearly 30% in
Europe over its 10-year P/E average, 10% in Asia, and close to
10% in broad emerging markets indexes. Interestingly, going in
the other direction, Latin American regional indexes look overbid
by about 20%.
At a large country 'BRIC' level, Russian shares may offer a
nearly 50% premium over their 10-year valuation averages; Chinese
shares a 25% premium; Indian shares a 12% premium. Going in the
other direction, Brazilian shares may be overvalued by 20%.
Source: Morgan Stanley Capital International.
(d) Investors hear about a 2% dividend yield on the S&P 500
index. However, equity indexes tied to the "Rest of the World"
Current dividend yields compared to 10-year average yields on the
same index offer another take on under and over-valuation in
Consult the MSCI international index dividend yield table below.
The biggest dividend opportunities are listed at the top of each
Source: Morgan Stanley Capital International.
What Holds Global Shares Back?
When it comes to global markets, there are enduring reasons to
doubt these equities can shake underperformance.
- Analysts deeply in the know urge investors to remain
overweight developed market equities.
- Analysts remain particularly cautious on emerging markets
-- due mainly to worries about China's growth prospects.
Are significant stock bargains to be had as a result of emerging
market index underperformance? Could overdue portfolio
rebalancing toward emerging world indexes, specifically country
indexes like Russia and China, be on its way?
Here are the three big enduring reasons to stay away:
1. A Slowing China
Emerging-market investors came into 2013 partly buoyed by
expectations China's GDP growth was intact.
But signs the Chinese economy is slowing has helped push down
China is just one part of the broader slump in commodity prices.
The drop in oil, precious and non-precious metals, and
agricultural commodity prices is making life rough for lots of
emerging-markets investors. The MSCI emerging markets index is
heavily weighted toward Energy and Materials sectors, which has
hurt its performance.
It's spelled trouble for funds heavily weighted toward country
indexes like Brazil or Russia too. These countries have
commodity-dependent economies that offer major Materials and
Energy stocks to international investors. Funds that had been
more focused on the so-called BRICs -- Brazil, Russia, India and
China -- had a leg up when commodities were booming. They have
been left behind compared with funds exposed to booming emerging
stock markets without major Energy and Materials companies, like
as Indonesia and Turkey.
2. Aggressive Easing in Japan
Japan's leaders get some blame for ongoing stagnation in
emerging markets' shares.
Aggressive monetary and fiscal stimulus has sent the Japanese yen
plunging. Japan's benchmark Nikkei stock index has rallied nearly
+70% since November -- even after a recent big correction.
The slumping yen -- down more than -15% versus the U.S. dollar
YTD -- aids Japanese exporters. But it works against competing
Asian companies outside Japan. In response, South Korea's KOSPI
Composite Index is down -1.2%.
For example, a weak yen hurts South Korean automakers Hyundai and
Kia, who compete directly against Japanese companies
). The weak yen is not an obstacle for Asian, European, and U.S.
firms that are part of Japan's automotive supply chain.
3. A Strident Germany
Germany's leaders don't look much better.
In Europe, the irony of the situation is there may be a
"beggar-thy-neighbor" condition playing out inside Europe. An
entrenched fiscal/balanced budget situation and an overvalued
real effective euro currency in terms of internal European trade
buttress the German economy.
This may be part of what is holding back the rest of Europe.
What About Global Markets Value Catalysts?
A few savvy pundits contend it is time for investors to scale up
global market exposure. Why?
• There are signs Europe's GDP slide is at
• The U.S. economy may be building up GDP
growth. Global spillovers could be significant.
These two catalysts could lead to institutional portfolio
rebalancing towards global markets.
- Ponder whether
a domestic move out of expensive, defensive sectors into
cyclical stocks could be replicated or tracked
inside emerging markets.
- Another stealthy conclusion? Watch specific global Info
Tech and Health Care shares and find a nice entry point.
Global Info Tech companies offer value priced cyclical stocks
with less downside risk than global/macro driven sectors like
Energy and Materials. A good example would be
), a mainland Chinese Internet Technology company.
BANCO BILBAO VZ (BBVA): Free Stock Analysis
ISHARS-EMG MKT (EEM): ETF Research Reports
HONDA MOTOR (HMC): Free Stock Analysis Report
LUXOTTICA ADR (LUX): Free Stock Analysis
NETEASE INC (NTES): Free Stock Analysis
BANCO SANTAN SA (SAN): Free Stock Analysis
SPDR-SP 500 TR (SPY): ETF Research Reports
TELSTRA CRP-ADR (TLSYY): Get Free Report
TOYOTA MOTOR CP (TM): Free Stock Analysis
To read this article on Zacks.com click here.
Certain global shares can be cash-rich. Look at Australian fixed
and wireless telecommunications company
). Australia's principal telco offers a 6% dividend yield.
Global Health Care shares can also deliver on strong and stable
earnings growth expectations. Look at Italian
Luxottica Group Spa
). The company is a leader in premium, luxury, and sports eyewear
with approximately 7,000 optical and sun retail stores in North
America, Asia-Pacific, China, South Africa, Latin America and
Europe. Proprietary brands include Ray-Ban, the world's most
famous sun eyewear brand, Oakley, Vogue Eyewear, Persol, Oliver
Peoples, Alain Mikli, Arnette and REVO.
Inside the Zacks Rank world, global Info Tech and Health Care
consumer stocks deliver low double-digit earnings growth
And more earnings surprises!
The stocks I mentioned in this last section are Zacks Rank #1