International stocks have done exceedingly well this year even when compared to US stocks. In a recent article by Andrew Hallam, he asks the question, “Do international stocks still have plenty of room to run?” In the article, he shows how foreign stocks have outperformed US stocks almost by double. This is based off a theory developed by a Yale University professor named Robert Shiller who created a cyclically adjusted price-to-earnings ratio or CAPE for short. CAPE looks at 10 years of earnings compared to the price of the stock and takes the average. The purpose of this is to determine whether a stock is overpriced, underpriced or priced fairly over a long period of time. The conclusion was that the US is overpriced and almost all foreign stocks are underpriced or neutral.
Price to earnings ratios are incredibly useful because they help us to discover value stocks. A similar principle is applied to countries with the CAPE method by saying that underpriced countries are “value countries”. However, this is not completely certain. To deal with this uncertainty, we invest in both US and International, growth and value, and we rebalance from there. It is also important to keep in mind that the world has currency fluctuations, so this can lead to a stock looking underpriced because the US dollar has been strong for many years and this is also subject to fluctuations. The article also does not account for the fact that some asset classes in the US might be underpriced rather than the whole market being overpriced. In conclusion, it is important to look at the whole picture, but international stocks do have plenty of potential.
Curtis Erickson | 11/02/2017