Tag Archives: international investing

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.)

Q3-Market Performance Review

Yesterday was the first day of the Fourth Quarter of 2018, so it’s a good time to assess where markets are for the year. Nobody should change their portfolios radically based on recent market moves, and, to the extent that anybody does, the long term bias should be gently adding what has dropped and trimming what has surged, keeping in mind that catching absolute tops and bottoms is difficult. But, from time to time, it can be useful to observe recent trends.

The first thing to notice about market returns through the first three quarters of 2018 is that U.S. stocks are up again. The S&P 500 Index closed the Third Quarter up 10.58% for the year, including dividends. Mid-cap stocks were up too, though less dramatically. The Russell Midcap Index gained 7.45% for the year through the Third Quarter. Small-cap stocks have gained about as much as the S&P 500, with the Russell 2000 Index up 11.51% for the year. And the Russell Megacap 50 Index also has a similar gain for the year of 11.69%.

Two Discrepancies

If U.S. stocks are having a good year, international stocks aren’t. The MSCI EAFE Index, which tracks stocks from developed countries, lost 1.43% for the year through the end of the Third Quarter. The MSCI Emerging Markets Index (MSCI EM NR) has done ever worse, shedding 7.68% for the year through the end of the quarter. Much of those losses are attributable to the dollar’s surge against foreign currencies, especially those of emerging markets. When U.S investors buy foreign stocks or a foreign stock fund, they typically get two sources of return, the stock’s return in its own market and the foreign currency’s return versus the U.S. dollar. That second return has hurt U.S. investors in foreign stocks this year, as the dollar has surged. A dollar surge also puts emerging markets under a cloud because emerging markets countries and companies borrow in U.S. dollars, making a dollar surge especially burdensome for them.

A second discrepancy is the difference in value and growth stocks. Value stocks tend to trade with lower price-earnings and price/book ratios, while growth stocks tend to trade with higher ratios precisely because of their anticipated growth in earnings and/or book value. The Russell 1000 Value Index rose a tepid 3.92% for the year, while the Russell 1000 Growth Index surged by 17.09%. the top-5 holding of the Russell 1000 Growth Index are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), and Alphabet (GOOG). The only one of the so-called “FAANG”s that it’s missing is Netflix, and the FAANG stocks have gained more than the overall market.

Bonds and REITs

Bonds, represented by the Bloomberg Barclays U.S. Aggregate Index dropped 1.6% for the year through the end of the Third Quarter. Interest rates have been rising in fits and starts. The yield on the 10-year U.S. Treasury has spiked up above 3% (where it rests now) during the year, but also fallen back at times. Bond yields move in the opposite directions of prices.

Volatility in the bond market has also likely influenced REIT returns. REITs pay out 90% of their net income as dividends in exchange for having tax-free status at the corporate level. The high dividend yield, low-growth companies often trade with some correlation to bonds. REITs (MSCI US REIT Index) tumbled in January and February of this year, the soared in March, May, and June. But in September they shed more than 2% to give them a roughly 2% year-to-date gain. That’s not terrible, but it lags the broader market’s return considerably. Large REIT companies that have declined for the year include paper and forest products company, Weyerhaeuser (WY), office landlord Boston Properties (BXP), and medical space REIT Ventas (VTR).

Judging Your Portfolio

If you have a lot of REIT exposure, that has probably been a drag on your portfolio. That’s why gunning after the highest yielding stocks is sometimes not a good idea. Additionally, if you have a lot of international stock exposure, that’s also been a drag. The discrepancy, for example between the year-to-date returns of the Vanguard Balanced Index Fund (5.6%) and an index consisting of 60% MSCI ACWI (All Country World Index) and 40% U.S. bonds (1.7%) is large.

That doesn’t mean you should exit all your international stock positions. What does badly one year can do better the next. In 2017, for example, international stocks outpaced domestic stocks, and emerging markets stocks, the dogs of this year, gained 37% versus the 22% gain of the S&P 500. Picking a single year’s winners isn’t easy.

Overall, investors should know that domestic stocks are considerably overpriced by any valuation metric one chooses to use. That doesn’t mean they can’t get more expensive, but nobody should be anticipating robust long-term returns from U.S. stocks.