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Why investors should be bullish on non-US stocks
By Ken Fisher | Tue, 27th June 2017 - 09:15
In early February, I told you Europe's thick uncertainty fog was opportunity knocking, with increased clarity likely awakening animal spirits and helping eurozone stocks shine in 2017. Halfway through and, right on cue, Europe is leading the world year to date.
Yet recently investors are falling out of love with Europe. Scepticism is resurging. To me, this is about the most bullish news of all, suggesting the case for Europe is intact even after the year's big start. Expect a second half repeat with even more gusto.
The first quarter was almost a perfect microcosm of my full-year expectations. Eurozone stocks outperformed, jumping 7.3% versus the world's 5.1% and America's 4.8%.
Political uncertainty fell as eurosceptic populism proved a widely hyped dud - first in the Netherlands, then France. Eurozone yield curves steepened while America's flattened, and economic data improved relative to America. The Fed raised rates and no one cared. Oil prices laughed at OPEC's cuts as the America's shale revolution extended the global supply glut. Big Tech and druggies led America.
Eurozone financials got a late start, drifting until late February, but they made up for it in March and beyond. Year to date, they're up 15%.
In US presidents' inaugural years, three things have historically been true:
• Non-US stocks have beaten US stock - averaging 9.6% versus America's 5.2% since 1929
• Early leaders were usually full-year winners, their margin frequently widening in the second half
• Both 1 and 2 usually wobble in the second quarter, shaking out the weak and teeing up that strong second-half run
While non-US stocks led in 14 of 22 inaugural years since 1929, if you narrow your sample to years when non-US stocks outperformed in the first quarter, it wins every time - 10 out of 10 (I exclude 1933, when America ditched the gold standard and currency markets went haywire, causing wacky skew).
In those 10 years, non-US's second-half lead averaged 10.2%. The spread widened in the second half 70% of the time. Similarly, sectors and countries leading early did best in the back half four out of five times - amazing consistency in markets. But the second quarter was usually a wild card, with early-year trends taking a breather.
So far 2017 fits the pattern near perfectly, with non-US leading in the first quarter then waffling a bit. Hence, eurozone stocks' recent underperformance tells me they have big inaugural-year mojo. They're doing just what you'd expect if the pattern holds.
I like eurozone banks' flat June and big US techies' infamous June swoon, too. These are the breaks you want to buy into, not flee.
Markets move most on the gap between reality and expectations, and nothing resets sentiment faster than a nascent trend flipping fast. For much of the spring, Europe and Tech were media darlings, attracting big fund flows and adoring coverage.
In Bank of America Merrill Lynch's monthly fund manager survey, big investors gushed over big opportunities all over the Continent, and who didn't love America's "FAAMG" Tech stocks?
At one point pundits boasted those five firms - Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Google (GOOGL) - were responsible for 41% of the S&P 500's year-to-date rise, so why bother owning anything but Tech? My answer: Because that obviously means other stocks drove the bulk of the gain, but I digress.
However, a few wobbles later the good cheer has morphed to fear. Now we're told "crowded trades" in Europe and tech are done - you've missed the boat, better find the next big thing. Few fathom early-year trends reasserting themselves in inaugural years' second halves.
Scepticism has returned to the marketplace. Great! Seems like a plum opportunity for the stock market to humiliate many at once, living up to my nickname for it - The Great Humiliator.
Overall, the trends I discussed in February should hold in this year's back half - and likely with more power. Even after France and the Netherlands, eurozone political uncertainty has room to fall in Italy and Germany, further stirring animal spirits.
Eurozone stocks and banks should party, backed by looser credit and faster loan growth. A growing world should power big tech, both US and non-US. Bouncing world trade should help Asia ex. Japan extend its early-year run. Slumping oil probably keeps the big raincloud over energy.
And, above all, this bull market should keep rewarding stock owners. If you aren't in, now is the time to buy. Here are two to consider:
Fun trick: If an age-old consumer brand is advertised in old newspapers and lifestyle magazines, and it's still around, it's here to stay. Google "vintage ads for Philips electronics" and you'll see why America's Royal Philips is still a strong buy at 125 years young.
Old fogeys like me remember Philips (PHG) for its 20th century consumer electronics - radios, VCRs, CD players, the works. But as these went obsolete, Philips adapted. Now the once-clunky conglomerate is a lean, mean industrials juggernaut focused on fast-growing healthcare technology and personal care products.
Buy it at 18 times my 2018 earnings estimate, and the ride as investors bid up big growth late in this bull market.
For years, folks piled into Japanese stocks, convinced unlimited quantitative easing and "Abenomics" would return Japan to its 1980s glory. Both flopped, investors are fleeing, and expectations are rock-bottom - your cue to buy!
Don't go overboard, but do put some money in stalwarts like Mizuho Financial Group (MFG), which should benefit when folks realise Japan is doing OK.
It's Japan's third-largest bank and boasts a strong global footprint, with fully 30% of its loan book outside of Japan and a thriving capital markets business. It's a bargain at 8 times my 2018 earnings estimate and the Land of the Rising Sun about to live up to its nickname.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Ken Fisher has been regularly featured in the financial media for over 30 years and was the pioneer of the Price-to-Sales ratio as a tool for investment analysis. Since 1979, Fisher Investments and its subsidiaries have provided customised guidance to institutional and individual investors. For more information on Ken Fisher and Fisher Investments UK please visit www.fisherinvestments.com/en-gb.
|MIZUHO FINANCIAL GROUP||$3.64||-0.55%|
|KONINKLIJKE PHILIPS NV||$40.59||-0.15%|
|All data 15min delayed as of: 10:55:26 23/04/18|