INSIGHTS

On July 23, 2024

The Best of the Rest

People love to cast shade on international investing but we’d like to point out that over the past 18 months, the return of the MSCI ACWI ex-U.S. was second best when compared to the S&P 500, the Russell 1000 Value, Dow Jones Industrial and S&P 500 Equal-Weighted indexes, making international investing “The Best of the Rest” and, we believe, poised for better results as markets broaden out.

During June, investors started to question whether the global economy was looking at a soft or hard landing and many sought the perceived “safety” of assured growth stocks, particularly the Magnificent 7 (a group of large capitalization, AI-oriented, highly-valued growth stocks found in the U.S.) International markets lagged. Politics dominated discussions in the quarter, causing notable pressures in some markets. Voters appeared angry that wages have not kept up with inflation, and higher rates prompted some economic slowdowns internationally. Our belief is that the newly elected governments will need to become more pro-growth, which should help the soft-landing thesis. In fact, the European Central Bank (ECB) lowered rates in June, and their inflation numbers continued to show moderation in prices. ECB easing without recession has typically led to good markets historically. Manufacturing remained under pressure, but less so. In short, a soft landing is our base case, and we think investors should remember a few positives:

• Many central banks have started to lower rates; a global easing cycle has started. The June swing to hard landing worries may be investors reacting to the ECB and Swiss bank easing measures and asking what the banks know that investors don't.
• We believe a global manufacturing recovery is still in the cards and that recession is unlikely. Cyclically, inventories are low, and secularly, the re-shoring movement and increased resiliency that western economies want to pursue requires manufacturing and investment. Lower rates may help as well.
• Earnings are expected to start growing again, supported by a potentially soft landing. Earnings expectations bottomed for the U.S. and Japan last year, and for China, the UK and Europe this year. Earnings recoveries are starting, and second quarter results should provide an important update on their progress.

Looking forward, we think investors will shift back to the soft-landing playbook as earnings recoveries unfold, and market participation will broaden beyond the market-dominating Magnificent 7 stocks. A broader recovery would likely reward the International and Equal-Weighted indexes more than the Magnificent 7, as their valuations leave little room for error. In fact, some analysts point out that highly valued stocks tend to have lopsided risk/reward profiles, where simply meeting estimates is not enough to justify their premiums and downside surprises are possible. New highs in markets tend to beget more new highs in markets.

Our sense is that this bull market still has room to run.

CRN: 2024-0717-11837 R

Opinions in this piece are those of Todd Asset Management and are not necessarily that of AAM.