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With 2022 in the rearview mirror, we have hit the ground running, eager to shake off the previous year’s dour market mood. Despite the prospects of recession, persistent (albeit declining) inflation, and restrictive central bank policies, we see pockets of momentum and optimism in 2023, particularly in foreign developed markets. For the past decade, U.S. equities dominated and were the most sought after markets for risk assets. However, this situation is changing.

Rising Returns

One month into the New Year, we are seeing strong gains across the board in foreign markets. The following table provides local currency and USD returns for several overseas stock markets. While the S&P 500 has enjoyed a rise of 6+% year to date, it has taken a back seat to the likes of Europe, Australia, and South Korea.

Currency Headwinds Tailwinds

When investing overseas, we are not only investing in local markets, but also the local currency. In addition to the stock gains mentioned above, foreign currencies have appreciated vis-à-vis the USD, further boosting returns for U.S. investors. We believe there is continued momentum favoring foreign markets as the value of the dollar weakens. As a result, our WCA Conquest Tactical Asset Allocation Portfolio weightings in foreign developed markets went from underweight, to neutral, to overweight over the past nine months.

Better Value Overseas

Foreign developed and U.S. stocks now trade at Enterprise Value to EBITDA multiples of roughly 8x and 12x, respectively (see Chart A). Of note, overseas markets have not traded at such a low multiple in the past 15+ years. Taking it one step further, we compare the U.S. to foreign EV/EBITDA multiple in Chart B. Today, foreign stocks trade at a 35% discount relative to the U.S. The disparity between foreign and U.S. valuations point to better value overseas.

Chart A

Chart B

Improving Outlook

China’s recent decision to scrap their draconian “Zero-Covid” policy and fully reopen their economy to the world has many excited about a spike in growth for the world’s most populous country. An unexpectedly mild winter throughout Europe and extensive government subsidization efforts have lessened the blow of expensive oil and natural gas as a result of Russia’s war with Ukraine. This has meant more money in consumers’ pockets to spend on other things, improving the outlook in Europe. 

Conclusion

Indeed, many are focusing their attention on foreign developed markets due to the attractive entry valuations, potential for earnings growth, and momentum. While this doesn’t signal an immediate withdrawal from U.S. stocks, it cannot be ignored. At Washington Crossing Advisors, our Conquest ETF Asset Allocation strategy makes portfolio weight changes based off of a myriad of economic readings and indicators, such as the currency exchange rates and foreign valuations mentioned above. By remaining disciplined and letting data inform decisions, we believe we can better tactically manage the portfolio from a top-down perspective as the global economy continues to evolve in front of our eyes.

Kevin R. Caron, CFA
Senior Portfolio Manager
973-549-4051

Chad Morganlander
Senior Portfolio Manager
973-549-4052

Matthew Battipaglia
Portfolio Manager
973-549-4047

Steve Lerit, CFA
Senior Risk Manager
973-549-4028

Tom Serzan
Analyst
973-549-4335

Suzanne Ashley
Internal Relationship Manager
973-549-4168

Eric Needham
Director, External Sales and Marketing
312-771-6010

Jeffrey Battipaglia
Client Portfolio Manager
973-549-4031

Disclosures

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.

Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.