Sept. 18, 2023
U.S. equities have had a strong run in the last decade. As a result, many investors’ portfolios likely have a higher weighting to U.S. stocks today compared to 10 years ago.
This makes it an opportune time for investors to consider rebalancing with potential opportunities abroad.
Here are three foreign markets that may offer investors major potential for the future:
Where the potential lies: India is a powerful growth story and it’s hard to find a country with a more compelling demographic profile.
- Demographics are favorable. More than half of India’s 1.4 billion citizens are under the age of 30.1 The country’s population is expected to surpass that of China this year, and it has a high percentage of the global working-age populace.2 India also has a strong educational system and its household formation is strong, with an estimated 9.5 to 10 million weddings annually.3
- The middle class is growing and increasing its spending. Consumer spending should help power the Indian economy forward. In 2012, 53.4% of Indians’ total consumption expenditure was discretionary items; that percentage had jumped to 59.6% by 2020.4
- India is benefiting from some companies’ decision to diversify their supply chains and move factories out of China. In recent years, the Indian government has invested in infrastructure and reduced taxes and regulations to encourage the movement of factories to its country. For example, in 2022 Apple announced it would be opening a new manufacturing plant in India.5
- Economic growth is robust. India’s economy grew 8.7% in 2022. GDP growth for India in 2023 is expected to be around 6% — well above growth in the U.S. — and even well above expected growth for China this year.
Considerations and risks: One drawback of the Indian stock market is its high valuations. The current P/E of the MSCI India Index is 26.45 versus 14.13 for the MSCI Emerging Markets Index.6 However, Indian stocks have historically traded at a premium. In addition, we believe Indian equities have been particularly expensive recently because investors are placing a premium on growth in a world where growth is slowing. But high valuations should not be a deterrent to gaining exposure to Indian equities; rather we believe it should encourage a long-time horizon for holding Indian equities.
2. Association of Southeast Asian Nations (ASEAN)
Where the potential lies: ASEAN is a political and economic union comprised of 10 southeastern Asia countries, including Indonesia, Philippines, Singapore, Malaysia, Thailand and Vietnam. Like India, this cohort of countries has many factors working in its favor.
- ASEAN countries offer a compelling demographic, as more than 60% of their population is under the age of 35.7 ASEAN household formation is also strong, and these countries have relatively healthy household and corporate balance sheets.
- ASEAN countries are also benefiting from the trend of companies diversifying supply chains and reducing exposure to China. Companies are particularly interested in moving manufacturing capabilities to ASEAN countries, such as Vietnam and Indonesia, because they offer lower labor costs and a more stable political environment. For example, Dell has announced it will be moving some of its manufacturing out of China and into Vietnam.
- The geographic location of ASEAN countries is advantageous, as they have easy access to Europe, the U.S. and China via traditional shipping routes. Not surprisingly, ASEAN countries are attracting increasing investment from outside the region; global foreign direct investment into southeast Asia has grown from $120 billion (USD) in 2013 to $174 billion in 2021.8
Considerations and risks: Growth is lower for ASEAN countries compared to India, but valuations are also lower. The P/E ratio on the MSCI ASEAN Index is 18.35, although it is higher than that of the MSCI Emerging Markets Index, which is 14.13. However, ASEAN stocks are more attractively priced than the global stock market, with the MSCI ACWI Index currently at 19.75.9
Where the potential lies: European equities are attractive, but for entirely different reasons than India or the ASEAN countries.
- Valuations are very attractive, with the MSCI Europe Index P/E ratio at 14.86 and the MSCI UK Index P/E ratio at 11.89.10 Inclusion of eurozone and U.K. equities in a portfolio can help lower overall valuations. What’s more, there is the potential for positive surprise because growth expectations are relatively low and negative sentiment is already priced in.
- Eurozone and U.K. economies are likely to be more resilient than originally expected. In our view, these economies will be able to avoid a “hard landing” and will experience a significant reduction in inflation, but with a lag. That, in turn, should cause their respective central banks to end rate hikes soon. And eurozone and U.K. equities could benefit once an economic recovery begins because their markets have greater exposure to cyclical sectors of the economy that are likely to benefit from an economic rebound.
Considerations and risks: Demographics are significantly different, and growth is not nearly as strong as that of India or ASEAN countries. There is also the risk that the eurozone and U.K. economies may experience a harder landing than expected, which would in turn delay an economic recovery and exert downward pressure on the stocks of these economies.
Reach out to your advisor for guidance
If you’re interested in learning about your portfolio’s exposure to foreign markets, reach out to your financial advisor. They can provide perspective on your portfolio’s allocation and make rebalancing recommendations that are aligned with your financial goals, risk tolerance and time horizon.