International stocks are outperforming on a relative basis despite US markets being on the upswing for four of the five weeks so far this year — and international valuations are still constructive.
This article was written with contributions from Ronnie Kuriakose. Ronnie is a Research Analyst on the SPDR Americas Research Team.
International stocks are outperforming relative to US stocks by 13% on a trailing three-month basis, ranking in the 99th percentile over the past 20 years.1 This is largely due to a weakening US dollar and fewer downside earnings revisions.
The Fed raised rates by 25 basis points (bps) last week. While a slowdown from its previous 50 bp hikes, the Fed indicated that the fight to tame inflation is far from over — especially as the January jobs report came in much stronger than expected. Despite the hike, the Consumer Sentiment Index is estimating an increase for February, for the third month in a row. Meanwhile, the lackluster earnings season continued as Big Tech firms released tepid results — and expectations for this week’s releases are about the same.
The International Monetary Fund (IMF) raised its world gross domestic product (GDP) forecast for 2023 from 2.7% to 2.9%.2 While still below the historical average of 3.8%, adverse risks have moderated since its previous estimate in October.
The European Union has revealed its Green Deal Industrial Plan. Widely seen as a response to the US’s Inflation Reduction Act, it aims to put Europe at the forefront of the clean tech industry through simplified regulations and bolstered investments in renewable energy technology.
Germany, France, and the UK are leading on price, technical, and continuous momentum levels.3 Despite the strong performance, valuations remain attractive for developed ex-US markets, with the relative forward price-to-earnings (P/E) ratio for the MSCI World ex-US Index trading at a 28% discount to the S&P 500® — close to a 20-year low — potentially offering an attractive entry point.4
Investors looking to benefit from the recent performance in developed ex-US countries may want to consider the SPDR® Portfolio Developed World ex-US ETF (SPDW) which, at 4 bps, is among the lowest-cost US-domiciled developed world ETFs.5
On a month-to-date basis, the non-US equity category saw $21 billion of inflows, its ninth-best month ever, while international region funds had their best month ever with a record $5 billion in inflows.6 Looking ahead, changes to 2023 earnings-per-share (EPS) estimates and the up-to-downgrade ratio also are being led by the European region and Japan, as seen below.7
2023 EPS Revision 3-month Up-to-downgrade Ratio
SPDW Standard Performance as of December 31, 2022
1 Bloomberg Finance L.P., as of January 31, 2023, based on the performance of the S&P 500 Index and the MSCI World ex-US Index.
2 World Economic Outlook Update, International Monetary Fund, as of January 30, 2023.
3 State Street Global Advisors, Bloomberg, as of January 31, 2023. Momentum is calculated by calculating the 3-month, 6-month and 12-month price performance, not including the most recent month. Past performance is not a reliable indicator of future performance.
4 FactSet, as of January 31, 2023. Characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. EPS growth estimates are based on Consensus Analyst Estimates compiled by FactSet. Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
5 Bloomberg Finance L.P., as of February 3, 2023.
6 Bloomberg Finance L.P., as of January 31, 2023.
7 FactSet, as of January 31, 2023. Characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. EPS growth estimates are based on Consensus Analyst Estimates compiled by FactSet. Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
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