| Why Foreign Stocks Will Be the Post-Brexit Winners | | By Brett Eversole | | Monday, July 11, 2016 |
| European stock markets suffered their worst day in years last month…
Italian stocks fell 13%. German stocks fell 7%. Spanish stocks fell 12%. On the other side of the world, even Japanese stocks took a hit, falling 8%.
The major crash was the result of the U.K.'s decision to leave the European Union (EU).
The decision caused ripples throughout the financial world. And the major decline in non-U.S. stock markets helped push foreign stocks to their lowest level EVER as compared with U.S. stocks.
As I'll explain today, this should lead to massive outperformance for foreign stocks in the coming years, based on history…
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Foreign stocks have seriously underperformed in recent years.
The recent crash, thanks to the U.K. decision, is just an exclamation point.
Specifically, the MSCI EAFE Index – which holds stocks in developed markets outside the U.S., mostly in Japan and Europe – is up just 13% in the last five years. The S&P 500 is up 74% over the same period.
This has caused the MSCI EAFE-to-S&P 500 ratio to hit an all-time low. Take a look…
When this ratio is high, foreign stocks are outperforming U.S. stocks. And when it's low (like today), they're underperforming U.S. stocks.
Importantly, foreign stocks tend to dramatically outperform U.S. stocks going forward anytime the ratio is less than one. The table below shows the average forward returns of U.S. and foreign stock indexes during those times…
| Index | 3-Year | 5-Year | | S&P 500 | -0.3% | 7.3% | | MSCI EAFE | 35.3% | 44.1% |
U.S. stocks have actually lost money (not including dividends) three years after these rare instances. And they've only gained 7%, on average, over the next five years.
Foreign stocks have soared in comparison… returning 35% and 44%, on average, over the next three and five years, respectively.
Now, this doesn't necessarily mean that U.S. stocks have to perform poorly from here. I actually believe they can continue moving higher. Most folks have completely given up on the U.S. market, as we've explained in DailyWealth. That's not how stock markets peak.
But while U.S. stocks still have room to run, foreign stocks offer even higher upside. The major underperformance in recent years proves it.
Uncertainty from the U.K. decision to leave the EU crushed foreign stock markets. But that makes the long-term opportunity even better today.
No, we don't have an uptrend right now. But as a "hold your nose and buy" opportunity, foreign stocks are worth considering.
You can make this trade with one click through the iShares MSCI EAFE Fund (EFA).
EFA tracks the MSCI EAFE Index. And based on history, that's the exact group of stocks that will likely outperform U.S. stocks over the next few years. Check it out.
Good investing,
Brett Eversole |
Further Reading:
Brett and Steve recently returned from a trip to China. While they were there, they learned about a place where dividend yields are higher than price-to-earnings ratios. Learn about this incredible opportunity here. |
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NEW HIGHS OF NOTE LAST WEEK Philip Morris International (PM)... tobaccoCampbell Soup (CPB)... soupGeneral Mills (GIS)... foodPepsiCo (PEP)... soft drinks Dollar Tree (DLTR)... discount stores
NEW LOWS OF NOTE LAST WEEK Fiat Chrysler Automobiles (FCAU)... automaker Honda Motor (HMC)... automaker Deutsche Bank (DB)... German bank Lloyds Banking (LYG)... British bank Royal Bank of Scotland (RBS)... British bank |
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| My proprietary screens point to Japanese stocks today... Many markets fell after the U.K.'s vote to leave the EU. But the best opportunity might be in Japanese stocks. |
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