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Trump’s Rise Highlights Lost Decade for Foreign Stocks

By Murray Coleman January 19, 2017

On the eve of Friday’s presidential inauguration of Donald Trump, uncertainty about the new administration’s trade policies with emerging economies ranging from China and Russia to Mexico is promising continued volatility for international stocks in a new year.

But such short-term concerns come on the heels of a longer list of political and economic upheaval across foreign markets.

“To a lot of people this really looks like a lost decade for international stocks,” says Jeffrey DeMaso, research director at Adviser Investments in Newton, Mass., which manages more than $3 billion. “They’re wondering, "Why even bother?'”

Raw return numbers over the past decade don’t paint a pretty picture. Since markets peaked in 2007 right before a global financial meltdown, Morningstar data show that developed international stocks – as measured by the MSCI EAFE index – had lost a cumulative 6% through last week. At the same time, the MSCI Emerging Markets index had slid 16.6%.

Meanwhile, the S&P 500 benchmark of blue-chip U.S. stocks had returned 79.5%.

“Emerging markets stocks would have to gain more than 20% in the first 10 months of 2017 just to get back to the breakeven point of where they were before the global financial crisis,” says DeMaso.

By contrast, U.S. stocks got an early boost from Trump’s election optimism over the new administration’s proposed pro-growth domestic agenda featuring tax cuts, deregulation and increased investment in America’s infrastructure.

“In the late ’90s, U.S. stocks were so dominant that investors largely ignored the long-term benefits of allocating across different parts of the world,” DeMaso says. “Right now, we’re concerned that conditions are ripe for a return of that same type of ill-advised investment behavior.”

Indeed, since Nov. 9, 2016 – the day after Trump’s victory – through last week, Lipper estimates $32.6 billion of net inflow into U.S.-focused stock mutual funds and ETFs. Meanwhile, a net $9.2 billion flowed out of nondomestic funds.

“In this market environment, we think it’s important to reinforce with investors how hard it is to try to take advantage of short-term trends to time market exposure to international and domestic stocks,” DeMaso says.

Before this “lost decade,” he points out that blue-chip international stocks on average gained a cumulative 12.4% from 2000 through 2009. The S&P 500 lost more than 9% during that same period. “We’re making sure to remind our clients early in 2017 that market cycles across the world can turn on a dime,” he says.

Advisor Rob Lutts in Salem, Mass., is also hearing from a lot of clients asking about cutting their exposure to international stocks.

“They’re looking in the rearview mirror over the past decade and wondering why we’re even suggesting that they go there,” says the chief investment officer at Cabot Wealth Management, which manages about $575 million.

For those looking to put new money to work or to rebalance between different asset classes, Lutts is playing up international stocks’ relatively attractive valuations. By his firm’s estimates, trailing 12-month price-earnings ratios of well-tracked emerging markets benchmarks are trading at roughly a 30% discount to U.S. equity indexes.

“We’re emphasizing with clients a need to be not only globally invested but also to include in their allocations a healthy dose of emerging markets,” Lutts says. “Besides continuing to provide excellent diversification from U.S. stocks, we think stock market returns in many of these countries are going to really surprise a lot of people over the next decade.”

Andy Kapyrin, the CIO at RegentAtlantic in Morristown, N.J., which manages $3.2 billion, is also warning his U.S.-based clients about a rise in what he describes as “home country bias.”

“It’s just natural for people to want to invest heavily in markets they know," he says. "But right now, we’re seeing that type of sentiment gaining momentum.”

With bullish domestic attitudes being supported by Trump's ascent and lingering concerns about the global economy, Kapyrin adds, he believes it’s important early in 2017 for advisors to "go the extra mile" and "take the time to discuss with clients the important role that global diversification can play in their strategic investment plans.”