In our last issue, we outlined the case for going international with more of your equity allocations. The reasons why were actually quite simple.
First, a strong U.S. dollar is bearish for currencies such as the euro and the yen, and weak currencies in these respective markets are equity bullish.
Second, on a valuation basis, international stocks are relatively inexpensive compared to U.S. stocks. For example, the price-to-earnings (P/E) ratio on stocks in Europe and Japan is, on average, about 12-13. The P/E ratio on stocks in the S&P 500 is roughly about 19. This means international stocks offer a better value proposition than domestic stocks at this juncture.
Finally, after struggling throughout much of the past two years, stocks in the Far East, Europe and Japan all are enjoying technical breakouts. This is true not only for developed international markets, but also for emerging markets.
Take a look at the chart here of the Vanguard FTSE Emerging Markets ETF (VWO). After a sharp post-election sell-off, emerging market stocks are off to a great start in 2017.
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