International equities have outpaced U.S. stocks over the past four years. And barring some year-end meltdown, the trend looks set to continue in 2006. This year through November 10, the S&P 500 was up 10.6% — a respectable, even praiseworthy number — but quite short of the 17.8% advance (in U.S. dollars) over the same period that was posted by the MSCI EAFE index, the leading benchmark for international developed equities. Moreover, the MSCI Emerging Markets index was up 19.3%.
What is causing this outperformance — and can it continue?
Some of the strength can be attributed to a weaker U.S. dollar, attractive equity valuations, and healthy profit margins, helped by ample global liquidity and corporate restructurings induced by M&A activity. But there’s another key factor at work; namely, the rest of the world is beginning to look more like the U.S.
America’s robust gross domestic product (GDP) growth over the past few years has been fueled largely by consumers’ appetite for everything from iPods to hybrid autos to home refurbishments. But as American spenders are tightening their purse strings, falling unemployment in developed countries is causing German, French, and Japanese consumers to loosen theirs.
More significantly, rising per capita income in emerging markets – which, according to the International Monetary Fund, account for 27% of global GDP – is dramatically increasing emerging middle-class demand for such things as autos, branded apparel, home appliances, packaged goods, and consumer electronics. This trend extends beyond products, however, and as employment rates and disposable income rise, consumers are demanding access to financial services and health care as well.