International Update: Summary

December 5, 2022

  • The USD remains the key driver for relative performance of International Developed (EAFE) and Emerging Market (EM) stocks versus the US (S&P 500)

  • Recent USD weakness has sparked a rally in non-US indices in October and November

  • Some of these rallies have resulted in improved trends in the short-term
    • The best short-term charts are India and (surprisingly!) Europe
    • China has seen the greatest % rebound, but this is more of a reflection of how oversold these indices were, with trends remaining weak

  • While some international markets have shown resilience in 2022: flat is the new up
    • UK, Japan, and Europe have shown better relative performance in 2022 versus the US simply by trading relatively flat all year

  • But for all of the short-term rebound, the long-term trends remain persistently weak
    • There are some early signs of trend improvement, but there have been many false dawns in these indices over the years, with 12–15-year downtrends still in place

  • How we interpret better short-term trends in the midst of weak long-term trends: the weak long-term trends suggests a lower probability that better performance vs. the US in 2022 will continue into 2023; we look for a catalyst for this outperformance to continue

  • Cheap for a reason: EAFE trades at a 30% discount and EM at a 35% discount to the US, the widest since the Great Financial Crisis (GFC); but this cheap valuation reflects that EAFE and EM have delivered NO earnings growth since the GFC (total EPS for the indices are still below their 2006/2007 peaks)
    • Valuation is not a catalyst, these indices have been the ultimate value traps with discounts persisting; we need a catalyst (weaker USD, big investment cycle from China) to go overweight
    • Though cheaper valuations have contributed to areas of better performance vs. the US in 2022; valuations simply had less room to fall compared to the US

  • Positioning:
    • We remain underweight International Developed and Emerging indices relative to the US, but are watching the USD for a sustained breakdown that could justify moving to neutral or overweight
    • We are watching early signs of improved trends in some regions of the world, such as Europe
    • We maintain a quality bias for our non-US exposure; we believe quality is an even more powerful driver of individual stock performance outside of US markets

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