Gloomy international headlines are creating opportunities for US investors.
Key takeaways
- In the second half of 2024, professional managers are finding opportunities in mispriced stocks of high-quality non-US companies.
- Many countries' economies may grow more slowly than that of the US in 2024, but long-term growth prospects remain brighter elsewhere.
- Despite short-term obstacles, Fidelity researchers expect international stocks to potentially outperform US stocks over the next 20 years.
The biggest opportunities may be in emerging market stocks, particularly Chinese companies. But there are pockets of potential in developed markets too.
While US stocks have hit record highs recently, shares of high-quality foreign companies may now present more compelling opportunities for US investors than those pricey domestic shares.
Short-term woes including rising geopolitical risks and election-year trade tensions mean that many international stocks are now trading at prices that may not reflect their potential. This temporary mismatch may make it a good time for investors to think about adding international exposure to their portfolios.
Why international stocks are bargains now Fidelity’s Asset Allocation Research Team expects non-US stocks to outperform US stocks in the years ahead. That’s because consumers in emerging market (EM) countries are forecast to be the major source of economic growth and profits for companies over the next 20 years.
Right now, though, many countries face higher inflation and slower economic growth than the US. Geopolitical tensions are also increasing. These include China's adoption of more nationalistic policies and the response by the US and Europe to those policies, the ongoing cold war-style proxy war between NATO and Russia, plus the possibility that a wider war in the Middle East could push up energy prices.
All this anxiety-making news is helping obscure the reasons for long-term optimism about international stocks. Despite the gloomy headlines, EMs are still expected to grow to comprise about half of global gross domestic product in 20 years, compared with about 40% now and 25% 20 years ago. That’s because they have relatively young and growing populations whose incomes will rise as their economies grow. India, for example, already boasts a greater number of households with disposable income of more than $10,000 than does Japan.
Bargain hunting in China
In the second half of 2024, the world’s second biggest economy may contain the world’s biggest bargains. “Several headwinds in China have resulted in historically attractive stock valuations compared with developed-markets stocks, leading to promising investment opportunities,” says Sam Polyak who manages Fidelity® Series Emerging Markets Opportunities Fund and looks for reasonably priced growth stocks of high-quality companies.
Rising trade and geopolitical friction with the US and Europe may be the most visible of those headwinds to US investors, but China also faces lingering effects of its very strict COVID-related lockdowns, increasing business regulation, and troubled housing markets. “These factors have combined to push stock valuations in China to all-time lows versus developed markets,” Polyak says.
But while there is plenty of bad news about China, it is just that: news. Polyak believes the headwinds—and headlines—will eventually calm and be forgotten without damaging the ability of high-quality Chinese companies to grow their earnings as economic growth reaccelerates.
World Bank Global Economic Prospects report
In fact, says Polyak, "We may be nearing a bottom in business fundamentals for China's stock market, and when that point is reached, it should help close the unprecedented valuation gap with stocks throughout the rest of the world."
For now, Polyak believes there are some great deals to be had among Chinese stocks. Says Polyak, "China is home to some of the world's most innovative social media, e-commerce, health care, and automation companies, so it's difficult to ignore when shares of these businesses are trading at what I consider extreme bargains. Many of these are consumer-driven companies that are taking business away from US-listed multinationals.”
Polyak points to PDD Holdings as an example of how Chinese companies are increasingly competing with US-listed multinationals. “PDD operates a value-oriented e-commerce platform known as Temu beyond China's borders. Temu’s expansion outside China has been a huge success and should double PDD's total addressable market, potentially improving its already compelling earnings growth," Polyak contends.
Another example is Haier Smart Home, the dominant home appliance company in China. Polyak says it has benefited from the successful launch and growth of its high-end Casarte brand, which now challenges premium US and European appliance brands.
“Haier's 2016 acquisition of GE's overseas appliance business has also been a huge success, setting the stage for the firm to be a key beneficiary of a sustained recovery in Chinese domestic consumption,” says Polyak.
But what about risk?
While international stocks are attractively priced right now, international investing does come with risks that investing only in domestic stocks doesn’t. Those include risks posed by governments and currencies.
The most important thing for investors to consider about any geopolitical event is whether it has consequences for companies, economies, and financial markets. Geopolitics probably didn't need to be a big part of the investor toolkit during the past few decades when globalization was on the rise. But that period was very unique to world history. Now, investors are going to need to pay more attention to geopolitical risk.
Consider emerging markets
Emerging Markets (EMs) have been defined as places where the actions of government policymakers may matter to investors at least as much as the rising and falling of the business cycle. That has meant that investing in them involved greater political, social, economic, and regulatory risks than investing in more developed markets.
While EM socks no longer hold a monopoly on policy risk, they are still likely to be potentially more volatile and less liquid than stocks from developed markets. But because they have not historically moved in lockstep with developed markets, they can help diversify investors' portfolios to help manage risk. Of course, diversification and asset allocation do not ensure a profit or guarantee against loss.
Investors should also keep in mind that the EM category contains a wide variety of companies operating in very dissimilar countries from South Africa to South Korea. The countries that are grouped within the same EM indexes may present very different opportunities and risks to investors. This makes both careful security selection by experienced managers and diversification within portfolios important for spotting opportunity while avoiding undue risk.
Don’t overlook developed markets
While EMs may present the most attractive investment opportunity for the second half of 2024, stocks of high-performing companies listed in Europe, Japan and other developed markets are also worth considering.
Bill Bower, manager of the Fidelity® Diversified International Fund, is also focused on finding high-quality companies that are being mispriced because of negative sentiment about the effects of geopolitical risk. "It's important to focus on high-quality companies that are world class, wherever they may be from," he says. DMs such as Europe offer lower stock prices than the US partly because European Union countries are suffering from higher inflation. But Bower says Europe offers more than just lower stock prices. "They're also home to high-quality companies with some unique investment ideas, like LVMH, which I believe is probably the most unique luxury goods company in the world," he says.
Fidelity® Diversified International Fund and Fidelity® Series Emerging Markets Opportunities Fund held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.
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