Few investing experts predict a major collapse for US stocks in 2020. However, concerns about slowing earnings and economic growth, extended valuations and the potential for more volatility tied to the presidential election may mean that the best market opportunities lie outside the United States.
Most global stock markets have lagged the performance of the Dow, S&P 500 and Nasdaq lately. That means that Europe and Asia are arguably more attractive for longer-term investors who want to diversify their portfolios.
“We would be looking more at international and emerging markets,” said Gary Hager, president and CEO of Integrated Wealth Management. “Will China benefit more from the phase one trade deal than the United States? It’s possible.”
Hager added that the record setting surge in the US markets make him nervous. He compared the run up to an earthquake, saying that if too much tectonic pressure builds up, that could eventually lead to an inevitable disaster.
“We’re advising clients to hold the course with US stocks. This is a melt-up that could precede a meltdown,” Hager told CNN Business.
Fed on hold but other central banks could act
Other experts point out there may be fewer levers that the Federal Reserve and President Trump can pull to boost economic and earnings growth further.
Interest rates have already been cut three times and Trump has already succeeded in getting Congress to lower corporate taxes.
“The US markets are going to lag this year because the current US-China deal isn’t going to add any significant help to the US economy,” said Naeem Aslam, chief market analyst with AvaTrade.
“Trump has tried (almost) all the tricks in the book, ” Aslam wrote in an email to CNN Business, adding that there might not be much more fiscal stimulus.
Aslam also said that the possibility of more monetary stimulus coming from the European Central Bank now that Christine Lagarde is in charge is potentially good news for European stocks.
“We believe that European markets can actually lead the rally because the central bank has a dovish stance here,” Aslam said.
Europe may not be the only international market that powers ahead. Several experts like China and other parts of Asia.
Much of Asia looks attractive — not just China
Earnings growth in Asian markets is likely to be higher than the United States and other developed markets, noted UBS Global Wealth Management’s chief investment officer Mark Haefele in a report this week.
As a result, Haefele now thinks investors should have a bigger position in emerging markets than developed ones like the United States.
“Equities are already pricing in better economic data,” Haefele said. “That leaves earnings growth as the primary return driver this year. We expect it to be best in in Asia…which favors emerging market equities.”
Other markets in Asia could be a better bet than China though. The good news about the US trade deal may now be priced into many top Chinese stocks.
“It’s harder to see how much more momentum there can be in China until there is a phase two deal. We’re looking for a catch up in other emerging market Asian countries,” said Emily Weis, macro strategist at State Street.
“There’s room for smaller countries in Asia to ride the China story,” Weis added, telling CNN Business that South Korea could be an indirect winner of better US-China trade relations. Even Japan, which has been languishing for decades, may finally mount a bit of a comeback.
“Improved trade sentiment will help Japan as well,” Weis said.
International stocks broadly should benefit from improved trade relations, says Wasif Latif, head of investments for VictoryShares & Solutions.
Latif said in an interview with CNN Business that it’s clear that China, Europe, Mexico, Japan and many other international markets were hurt more by the trade spats than the United States was.
Better value in international stocks as US market hits record high
So it stands to reason that other countries will enjoy a bigger benefit from the cessation of trade skirmishes than the United States will — especially since many international stock markets trade at lower valuations than US stocks.
“We’re ripe for a reversal. Yes, international stocks have been cheap for a while. So why are they attractive now? Investors are finally seeing a light at the end of the tunnel with regards to trade wars,” Latif said.
He also pointed out that the recent pullback in the value of the US dollar as the Fed cut rates should also boost profits for international companies.
At the end of the day, it all comes down to laws of gravity. What goes up must come down, and the US stock market has mostly gone up since the last bear market ended in 2009.
“To achieve better returns investors will need to consider expanding their portfolios to include more foreign stocks, that are less highly valued,” said David Kelly, chief global strategist with JPMorgan Funds, in a report this week.
“Great past performance does not predict great future returns. Rather the opposite is the truth: great past performance, which has resulted in high valuations, predicts mediocre future returns,” Kelly added, arguing that US stocks now look too expensive.