International Calling

8/3/2015


The MSCI EAFE (Europe, Australasia, Far East) Index, a benchmark for international equity markets, is doing something it hasn't managed in a while — beating the S&P 500 Index. Year to date, the MSCI EAFE has returned 5.9% in U.S. dollars versus 2.8% for the S&P 500.

Heading into 2015, the S&P 500 had beaten the MSCI EAFE for four of the last five years.

Given problems in Greece and the Kabuki theater that is the eurozone; volatility in the Chinese equity markets and concerns that China's growth is slowing sharply; and chronic tensions and turmoil in Eastern Europe, the Middle East, and parts of Africa, some readers may be surprised to see international stocks beating U.S. equities. However, a number of factors have provided tailwinds that could keep the ride moving:

Reversion to the mean. Markets are like pendulums, with market cycles and leadership swinging back and forth. Given the prolonged outperformance of U.S. stocks — the performance gap between U.S. and foreign stocks reached a crescendo in 2014, with the S&P 500 beating the dollar-denominated MSCI EAFE by more than 18 percentage points — the pendulum was due to swing back.

Valuation. The MSCI EAFE trades at a forward price/earnings ratio of 15, versus nearly 18 for the S&P 500 Index. The MSCI EAFE also yields half-again as much (3.0% versus 2.0%).

Accommodative central banks. While the specter of higher interest rates continues to hang over U.S. markets, central banks in Europe and Japan have adopted extremely accommodative monetary policies.

Small positions in foreign stocks. U.S. stocks make up less than 50% of the total global stock-market value, yet represent roughly 90% of the holdings in an average U.S. investor's stock portfolio, according to the National Bureau of Economic Research. If U.S. investors decide to boost their foreign exposure, they could drive international stocks higher.

Don't misconstrue this article. We're not advising investors to dump U.S. stocks and load up on international equities. The message is that investors must be willing to look in all corners of the market — U.S. and overseas — for opportunities. Below we present two intriguing foreign options, though only one makes our buy lists.

China Mobile ($64; CHL) has fallen 15% from its 52-week high of more than $75 per share. China Mobile operates the world's largest mobile network with a customer base totaling more than 800 million users. The stock, yielding nearly 3%, sports an Overall Quadrix® score of 71 and no category scores below 50. The inherent risk of China's stock market and the company's good-but-not-good-enough Overall score make it difficult to rank these shares Buy. However, China Mobile's price discount to its 52-week high, solid yield, and strong market position should put it on investors' watch lists. 


Not that long ago, Shire ($263; SHPG), based in Ireland, was among the hunted. The pharmaceutical firm had a deal on the table to be acquired by AbbVie ($71; ABBV), only to see that deal fall through last October, due in part to political pressure from Washington and possible tax-law changes that would mitigate the deal's benefits. Shire has now become the hunter, acquiring NPS Pharmaceuticals earlier this year and promising to do additional deals on its way toward a goal of nearly doubling sales to $10 billion annually by 2020. Shire said June-quarter earnings per share slipped 2% to $2.63 excluding special items, falling $0.18 short of the consensus due to higher spending on new drugs. Total revenue rose 4% to $1.56 billion. Shire raised its 2015 outlook for per-share profits to mid-to-high single digit growth. Shire, the Forecasts' favorite international stock, is a Focus List Buy and Long-Term Buy.


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