International stocks have trailed U.S. stocks for much of the past decade, with only brief periods of outperformance. Consequently, many investors have wavered in their commitment to global diversification.
Within the international investment universe, European and Japanese stocks face skepticism, given tepid economic growth, demographic challenges, and often-questionable economic policy choices.
However, it may be time to take a fresh look at European and Japanese stocks as the global economy begins to heal from the economic shutdowns caused by the COVID-19 pandemic.
The following five factors boost the outlook for Europe and Japan:
1. Promising signs of containment of COVID-19.
Europe is ahead of the U.S. in containing COVID-19 infections, with activity and mobility measures signaling positive economic momentum. Japan has efficiently handled its COVID-19 outbreak with fewer lockdowns.
In contrast, parts of the U.S. are experiencing a worsening first wave of infections or the start of a troubling second wave of infections. The U.K. also has daunting challenges, with still-high infection and hospitalization rates, a stumbling economy, and many unanswered questions about Brexit.
2. Government and central bank efforts to offset the economic damage caused by COVID-19.
Monetary policy remains loose in Europe and Japan, with the European Central Bank (ECB) notably expanding its bond-buying efforts to provide additional liquidity to countries such as Italy and Spain. Forward guidance signals that policy will remain easy for the foreseeable future.
European stocks trailed U.S. stocks in the initial recovery from the March lows, in part because of a slower fiscal policy response. There are promising signs on the policy front, in contrast to the experience of the past decade. Germany is breaking with its frugal past by providing significant fiscal support, as is Japan. Both countries are providing support that totals more than 10% of GDP.
The European Union’s budget includes funds earmarked to help member states rebound from the economic damage associated with the COVID-19 pandemic. The most noteworthy aspect of the plan is that it is funded by the issuance of hundreds of billions of euros in bonds that will be obligations of the EU rather than member states. The recovery plan is a symbolic leap toward fiscal union.
Stimulus from China is also likely to help global industrial production, boosting exports from Europe and Japan.