Why Foreign Stocks Are Still A Buy

International equities are leading U.S. stocks this year. For example, developed European markets are well ahead of American stocks at least so far this year. The year-to-date returns of some of the major equity markets are listed below:

S&P 500 Index: 2.39%
Canada’s S & P/TSX Composite: 2.1%
UK’s FTSE 100: 7.0%
France’s CAC 40: 19.1%
Germany’s DAX Index: 22.8%
Spain’s IBEX35 Index: 11.1%
China’s Shanghai Composite: 11.8%
India’s Bombay Sensex: 2.8%
Brzail’s Sao Paulo Bovespa: 3.9%

Data Source: WSJ

With major European markets such as Germany trouncing the U.S. this year, some investors may be wondering if foreign stocks are still attractive at current levels. Fundamentals show that foreign stocks have still room to run. Developed stocks especially are attractive even after the current run up. I came across an interesting article by David L. Ruff, CFA of Forward Management in which he lays out the arguments in favor of international stocks. From the article:

International equities are attractive now
Historical trends unfortunately don’t reveal much about exactly when international equities may once again outperform, but a variety of metrics, including yields, valuations and earnings, reveal international stocks to be attractive in the current climate regardless of their relation to U.S. equities. As shown in the chart below, dividend yields are higher abroad. Valuations also favor non-U.S. equities, with foreign markets trading at 45% to 50% discounts on a price-book basis. While profitability favors the U.S., non-U.S. returns on equity are also attractive. Earnings growth for Europe and Japan has overtaken the U.S. due to weakening in their currencies and lower oil prices will help foreign markets with greater hydrocarbon/commodity import exposure. These metrics highlight that it is unnecessary and even unfavorable to wait for outperformance as great opportunities exist in international equity markets right now.

Key Metrics: U.S. vs. Non-U.S.

Country Dividend Yield 3-Year Dividend Growth Rate Price- Book Price-Earnings Enterprise Value/ EBITDA Latest Earnings Growth5 Return on Equity
U.S.1 2.02% 18.8% 2.7x 17.6x 11.1x 7.4% 23.1%
Non-U.S.2 3.19% 16.5% 1.5x 15.0x 8.4x 4.9% 17.3%
Non-U.S. Developed3 3.33% 15.6% 1.5x 16.2x 8.7x 17.2% 16.8%
Emerging Markets4 2.67% 20.6% 1.4x 12.1x 7.5x -7.2% 18.3%
Sources: Morningstar, HFR and Forward, as of 01/15/14
Past performance does not guarantee future results.1 Based on iShares S&P 500 Index data
2 Based on iShares MSCI ACWI World ex-USA Index data
3 Based on iShares MSCI EAFE Index data
4 Based on iShares MSCI Emerging Markets Index data
5 Latest earnings seasons quarterly earnings year-over-year growth, 10/15/14-01/15/15
Source: Don’t Stop Believing: The Case for International Equities, Mar 12, 2015, Forward Management LLC

Investors willing to wait for five years or more can consider adding developed equities at current levels though additions in smaller chunks is better than a single investment.

Five stocks from developed countries in the MSCI EAFE Index are listed below for further research and potential investment:

1.Company: Singapore Telecom (SGAPY)
Current Dividend Yield: 4.20%
Sector: Telecom
Country: Singapore

2.Company: Westpac Banking Corp (WBK)
Current Dividend Yield: 5.12%
Country: Australia

3.Company: Enbridge Inc. (ENB)
Current Dividend Yield: 3.04%
Sector: Oil & Gas
Country: Canada

4.Company: Cathay Pacific Airways Ltd (CPCAY)
Current Dividend Yield: 1.48%
Sector: Airline
Country: Hong Kong

5.Company: Rogers Communications Inc (RCI)
Current Dividend Yield: 4.34%
Sector: Telecom
Country: Canada

Note: Dividend yields noted above are as of Mar 20, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

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