Tag Archives: Foreign stocks

Foreign Stocks And Funds Worth Considering

Foreign stock markets have underperformed U.S. stocks this year (if you exclude U.S. small caps). The MSCI ACWI ex-USA Index is down nearly 14% through December 18. But for the month of December, the trend has been changing, with U.S. indices dropping more than foreign indices. And that means it may be time to look at some foreign stocks.

First on the list are German automakers. They are under a lot of pressure from tariffs, slowing sales, which have arguably been boosted by easy credit over the past few years, and perhaps even competition from Tesla, which has brand cachet. Still, Daimler (DMLRY), BMW (BMWYY), Volkswagen (VWAGY), and Porsche (POAHY) look cheap. They all trade at single-digit P/E ratios and P/S ratios of 0.5 or less.

If you’re looking for additional confirmation, the Oakmark International fund (OAKIX) ,run by Morningstar’s International Equity Manager of the Decade in 2009 David Herro, has nearly than 8% of its assets in Daimler and BMW according to its September 30 portfolio. This fund has struggled mightily this year with a nearly 23% loss through December 18, but it has outpaced the MSCI ACWI ex-USA Index for the past 10- and 15-year periods with Herro at the helm for the entire time.

Another stock to consider is Rolls Royce (RYCEY). I don’t mean the auto maker here, which is actually a division of BMW these days, but the jet engine maker. Along with General Electric, Rolls is part of a duopoly in the wide-body commercial engine space. Nobody else makes engines for the largest commercial planes. Pratt and Whitney, for example, makes engines for medium-sized commercial planes. Rolls has had production trouble, and investors have been clamoring for the firm to spinoff or sell other divisions. The American Depository Receipts traded at around $20 per share a decade ago, and are now at around $10 per share. The stock trades at under 1x Price/Sales.

Investors should also check out French pharmaceutical company Sanofi (SAN). It’s the top holding of the Dodge & Cox International Stock fund. The firm markets drugs with an emphasis on oncology, immunology, and cardiovascular disease. It also happens to be one of Berkshire Hathaway’s (BRK.A) publicly traded holdings.

For emerging markets exposure, consider the iShares Emerging Markets Dividend ETF (DVYE). This fund doesn’t look like the typical emerging markets fund because its dividend emphasis leads it to hold stocks from different countries than other funds. For example, the MSCI Emerging Markets Index has 30% exposure to China and another 33% exposure to South Korea, Taiwan, and India. But the dividend ETF has nearly 30% exposure to Taiwan. China clocks in as the fourth highest represented country with its market soaking up less than 10% of the portfolio. One risk of this dividend ETF is that 16% of its assets are in Russia, which makes its shareholders likely partners with Vladimir Putin in those holdings. Nobody ever said emerging markets investing was easy, but at least investors in this fund are getting a 5.65% dividend yield and an average P/E ratio of less than 10 for their trouble.

(John Coumarianos has positions in DMLRY, BMWYY, VWAGY, RYCEY, OAKIX, and DVYE.)

Rising Rates And Funds

There’s always something else to worry about. For a while now, investors we admire such as Grantham, Mayo, van Oterloo (GMO) and Research Affiliates have been touting the cheapness of foreign stocks, especially emerging markets stocks. This past August James Montier of GMO argued that an allocation to the S&P 500 Index, given its valuation then, counted more as speculation than as an investment. Also, in November, Research Affiliates published a paper questioning whether anyone needed U.S. stock exposure.

Valuations of foreign stocks are indeed more compelling than those of their U.S. counterparts. But U.S. investors must account for other things when venturing abroad, including currency moves. When U.S. investors own a foreign stock that trades on a U.S. exchange, they receive two returns, the return of the stock in its local currency and the movement of the local currency relative to the U.S. dollar. In other words, U.S. investors take on foreign currency exposure when they own foreign stocks. Lately that has provided some pain as the dollar has surged thanks to rising interest rates. From the lows of this year in February, the U.S. dollar has surged more than 4% against a basket of foreign currencies.

And that means investors in foreign stock have suffered, though those stocks have not necessarily performed badly in their local currencies. For example, the MSCI EM Index has dropped 1.72% and 3.97% over the past month-to-date and three month periods, respectively, through May 9, 2018 when translated into dollar terms – in other words, for ordinary U.S. investors without a currency hedge. But in local currency, over the same two time periods, the same index has dropped only 0.73% and 1.46%, respectively.

In the realm of developed markets, the MSCI EAFE Index has delivered a month-to-date and three-month return through May 9, 2018 of -0.07% and 0.37%, respectively, when translated to the dollar. But it has delivered 1.10% and 3.29%, respectively, to investors with a hedge, thanks to the strengthening dollar and weakening foreign currencies.

Currency moves are hard to time, and that means most investors like to stay unhedged or hedged at all times. Is there one of these that’s better? A paper by asset manager AQR argues that, over time, investors haven’t gotten paid for the volatility they’ve incurred from foreign currency exposure. The lesson for long-term U.S. Investors is to hedge their currency exposure. That makes some sense because while currencies move up and down against each other over long periods of time, those moves tend to cancel each other out. There’s no long term gain to be captured from a currency bet.

Now, despite the dollar’s run lately, the greenback looks relatively high versus a foreign basket of currencies over a longer period of time. In that case, foreign currency exposure might actually help. So if investors are expecting the dollar to fall over a longer period of time, they can hedge some prearranged percentage of their foreign stock portfolio.

Some instruments with which investors can gain hedged currency exposure to foreign stocks are the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) and the xTrackers MSCI Emerging Markets Hedged Equity ETF (DBEM). The first gains exposure to the MSCI EAFE with a currency hedge, and the second gains exposure to the MSCI EM Index with a currency hedge.

May I Please Have Some Yield?

Apart from the esoteric realm of currency hedging, rising rates have also caused rates to, well, rise on short-term debt funds. And that can be a boon to investors – especially those with a penchant to ride out expensive markets with at least some of their money in cash. PIMCO’s Enhanced Short Maturity Active ETF (MINT) might be a decent choice for safety with some yield. It owns high quality short-term debt instruments (Effective Maturity – 0.61 years), including both sovereign and corporate debt, and its current yield is 2.18%. Not all the instruments are from the developed world, and the fund can take a bit more risk than the average money market fund. But the fund doesn’t use options, futures, or swaps and discloses its holdings on a daily basis.