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Dissecting International Signals

July 11, 2018

Key Takeaways
  •  A dichotomy exists between the U.S. and the rest of the world in terms of economic momentum and monetary policy that is reflected in lower equity valuations for international developed and emerging markets.
  • The outperformance of the U.S. vs international markets is cyclical and long lasting, with the U.S. having led since 2007. At this point in the cycle, history would suggest a reversal may be coming soon.
International Markets and Economies Still Playing Catch Up

Global economies are so interconnected today that it makes sense to examine the fundamentals in regions outside the U.S. as a component of an assessment of the health of the domestic market and economy. In conjunction with our U.S. recession research, we have developed a dedicated international roadmap (Exhibit 1) that provides a high-level look at some of the factors impacting major economic regions around the globe.

This snapshot reveals a dichotomy between the U.S. and most of the rest of the world in terms of economic momentum and central bank policy. The U.S. was the first major market to recover from the global financial crisis and remains ahead of other regions in moving from accommodative monetary policy meant to spur growth to a more neutral policy stance that has included three consecutive years of interest rate increases. Europe, Japan and the rest of developed Asia, meanwhile, have retained easy monetary policy to keep their recoveries on track or avert recession. These actions have supported stable economic growth in Europe Ex-UK and accelerating growth in Asia Ex-Japan. Emerging markets are also experiencing stable growth while the UK and Japan have work to do to reverse decelerating growth trends.


Exhibit 1: International Roadmap


Data as of June 30, 2018. Source: S&P, Moody’s, MSCI and Bloomberg. North America P/E and EPS growth is S&P 500, all others are MSCI Country/Region Index. 


The global economy has never been in better shape as measured by countries in recession. While recent weakness in Europe and China has raised concerns that the current period of synchronized global growth will be fleeting, we believe ample liquidity and the ongoing transition toward a consumer economy in China will keep growth solid in the near to medium term.

Valuations in international markets have tended to reflect the pace of economic recovery, with all regions outside the U.S. trading at more attractive valuations. Looking at U.S. versus international equity markets, one has historically outperformed the other for long periods of time, anywhere from three to 10 years (Exhibit 2). U.S. stocks have been outperforming since 2009. Yet given the fact that most markets around the globe are earlier in their economic cycle and international markets are starting from lower valuations, we believe they have greater potential upside over the next several years.


Exhibit 2: U.S. vs International Performance

Data as of June 30, 2018. S&P 500/Total Return vs. MSCI EAFE/Net Return. Source: FactSet.


Jeffrey Schulze, CFA

Investment Strategist
16 Years experience
7 Years at ClearBridge

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  • All opinions and data included in this commentary are as of July 11, 2018 and are subject to change. The opinions and views expressed herein are of Jeffrey Schulze and may differ from other investment professionals, or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information. 


  • Past performance is no guarantee of future results.

  • Performance source: Internal. Benchmark source: Morgan Stanley Capital International. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information. Performance is preliminary and subject to change.

    Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Further distribution is prohibited.