Not Too Late For Int'l Exposure

November 08, 2017

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Dave Garff, president of Walnut Creek, California-based Accuvest Global Advisors.

One of the great things about our business is that we get to talk to advisors of all shapes and sizes, all across the U.S. and beyond. For the past five years, most have not wanted to discuss international (non-U.S. and emerging markets) investing.

After all, most individual investors, pensions and nonprofits are less comfortable with international investing because they feel less informed about what is going on with economies and companies outside the U.S.

And of course, investors who had non-U.S. exposure during that time period had good reason to question what was going on. From 2013 to 2015, emerging markets underperformed the U.S. by more than 65%. 


Asset Class 2011 2012 2013 2014 2015 2016
MSCI USA 1.4 15.3 31.8 12.7 0.7 10.9
MSCI EAFE -12.1 17.3 22.8 -4.9 -0.8 1.0
MSCI Emerging Markets -18.4 18.3 -2.6 -2.2 -14.9 11.2

Sources: MSCI, Accuvest


I still have a vivid memory of the conversations we had during those three years—all about the benefits of global diversification—most of which fell on deaf ears at that point. And advisors, who were having the same conversations with their clients, just had to pull the plug on their emerging market exposure.

Going in to 2017, most investors had very heavy U.S. allocations. If it wasn’t broke, why did they need to fix it? In addition, there was a very strong sentiment on the buy side (and sell side) that the U.S. dollar was going to strengthen, which bolstered the case for maintaining a significant U.S. overweight.

But, as we have seen in the past, strong relative returns create interest in an asset class. In the first quarter of 2017, the MSCI Emerging Markets index (EM) was up 11.4%, the MSCI EAFE index (EAFE) was up 7.25% and the MSCI USA (U.S.) index was up 6.1%. Advisors took notice, and began to “watch” the international markets more closely.

At the end of the second quarter, EM was up 18.4%, EAFE was up 13.8% and the U.S. was up 9.2%. Those are great returns for a six-month period in any market, and the relative return was actually enough for one large brokerage firm to close its EM overweight and take profits.

But now advisors were really showing interest, and we were having lots of conversations about what the future held for overseas markets. Some took action, and others took a more wait-and-see attitude. Now, through Oct. 31, EM is up 32.3%, EAFE is up 21.8% and the U.S. is up 16.5%. 


Source: Bloomberg; data as of 12/31/16-10/31/2017

For a larger view, please click on the image above.


Missed Opportunity?

So now the question we are getting is, have I missed the opportunity in international, and specifically in EM? You can probably guess what our answer is to that: an emphatic no! International investing still makes a lot of sense in the current environment, even with the huge outperformance this year versus the U.S. There are three reasons we think international markets still make sense:

  1. On a variety of measures, EM and EAFE are cheap relative to the U.S. 

    Asset Class Price/Book Price/Cash Earnings Price/Trailing 12-Month Earnings
    MSCI USA 3.2x 14.7x 23.9x
    MSCI EAFE 1.7x 9.9x 18.3x
    MSCI Emerging Markets 1.8x 9.9x 15.7x
  2. Historically, the cycles of outperformance of Developed International versus U.S. stocks tend to last about four years, adding about 80% of outperformance. We are less than one year in to the current cycle. Our comments from May 2017 can be found in our June blog on the topic.
  3. Growth is stronger outside the U.S. Yes, it is true that GDP growth does not correlate to stock market performance. We prefer to look at leading indicator (LEI) growth. According the OECD, as of 10/2017, the vast majority of EM countries are showing stronger LEI growth (average 0.15%) than the developed and G7 countries (0.02%).

Are there risks out there to global investing? Absolutely. Are there things that are unforeseen that could cause markets to go down significantly? No doubt.

But the question here is, is it too late to get involved in international and emerging markets? We think the balance of the evidence says no: There’s still time to get involved.

Accuvest Global Advisors (AGA) is a registered investment advisor based in the San Francisco Bay Area. Founded in 2005, AGA has drawn considerable recognition in the industry for its work in building global strategies through the use of single-country ETFs. For more thought leadership and firm updates, visit, or email [email protected]. For a list of full disclosures, please click here.

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