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Game over for international equities?

Wells Fargo Investment Institute - January 2018

International equity markets last year broadly outperformed U.S. stocks even as the Nasdaq Composite, Dow Jones Industrial Average and S&P 500 indices shattered records. To better understand this outperformance, let’s briefly take a look at what happened in emerging and international developed equity markets. 

Transcript: Monthly Investment Outlook: Game over for international equities?

International equity markets last year broadly outperformed U.S. stocks even as the Nasdaq Composite, Dow Jones Industrial Average and S&P 500 indices shattered records. To better understand this outperformance, let’s briefly take a look at what happened in emerging and international developed equity markets. 

[Chart 1: MSCI EAFE, EM, and U.S.]

Emerging market stocks, as represented by the MSCI Emerging Markets Index, rallied over 34% in 2017, outperforming U.S. stocks by nearly 15%. Much of this outperformance came from emerging Asia and most notably from a strong showing in Chinese tech stocks. In developed equity markets, as represented by the MSCI EAFE Index, stocks rallied nearly 22% in 2017, outpacing U.S. equity markets by 2%. This outperformance was driven by broad-based rallies in Eurozone stocks, notably in the German, French, Italian and Spanish markets.

Title graphic: U.S. may take the lead 

In the coming year, we anticipate positive performance in international markets, but generally expect U.S. equities to outperform compared to 2017. This outlook has less to do with any foreseeable headwinds to international equities than it does with what we expect to be tailwinds to the U.S. market. 

For example, we expect tax reforms that were passed into law late last year to underpin U.S. corporate earnings, notably in small-to-medium sized businesses as the economy gets a boost. As a result, we expect investors to favor U.S. markets over international in anticipation of greater corporate investment spending activity and larger bottom-line earnings growth.

Title graphic: Game over for international equities?

So what does this mean for international stocks? While we expect U.S. stocks to outperform this year, we continue to view international equity exposure as an important portfolio diversifier and believe that there continues to be upside potential for international equity markets in 2018. For example, we believe that the fundamental improvements underpinning last year’s outperformance in international are likely to continue into the year ahead.

[Chart 2: Wells Fargo Investment Institute Global Diffusion Indices]

More specifically to this point, the global economy last year experienced its first synchronized recovery since the peak of the Global Financial Crisis. For the first time in over a decade, major economies like Japan, Germany, Korea, and China are expected to post positive economic gains along with the U.S. So while we anticipate U.S. stocks to do better in 2018, we still expect international equities to exhibit positive performance over the course of the year.


Risk Considerations

Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks.

General Disclosures

The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request. 

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

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