Even though a steady stream of money has flowed out of U.S. stocks into overseas markets, investors expect European and emerging market equities to rise further, supported by expectations for economic growth and accommodative central bank policies.
U.S. fund investors put the most money into overseas equities since the second quarter in 2015, with more than half of the $90 billion outflows for the first half coming in the second quarter, according to preliminary Lipper data.
The MSCI Emerging market index has risen 17% year-to-date compared with a 4.9% rise for Europe’s Stoxx 600 index and the S&P 500 index’s 8% gain.
Currency boost
Since emerging market central banks have been lowering interest rates and their currencies have been falling in recent years this is now helping to boost economic growth, according to Northwestern Mutual’s Chief Investment Strategist, Brent Schutte.
But still the emerging market index is roughly 25% off its all-time high reached in 2007 while the Stoxx 600 is 8% off its record high. In comparison the S&P 500 is just 1% below its latest record, reached in June.
The overseas indexes could reach new record highs over the next two years, according to Jack Ablin, chief investment officer at BMO Private Bank citing improving growth.
“Finally the recovery has really picked up in the rest of the world. It’s moving along faster than the U.S. because it’s trailed. The U.S. is further along because the central bank here really was aggressive in quantitative easing first,” said Mr. Ablin.
For the second quarter, revenue for companies in European markets are expected to grow 5.8% compared with 4.6% for S&P 500 index companies and 11.5% for emerging markets in the Asia Pacific Region, according to Reuters data.
Earnings estimates for European companies for the period stand out with a 13.5% jump seen compared with 8% growth expected for the S&P 500 and 6.4% for emerging markets.
Mr. Schutte’s firm is betting that outperformance in emerging market and European stocks should continue and he cited a 1-2 year timeframe for investment in euro zone stocks. His firm started moving money into non-U.S. stocks around February 2016.
