The international markets have under performed the US markets heavily over the past five years as the US markets have rebounded from our “Great Recession”, and US Monetary policy has pumped liquidity into the markets through three quantitative easing programs. Additionally, Europe struggled with a debt crisis in 2011 that largely held their markets back from their recovery. However, we do believe that we are seeing signs that European Markets are starting to bounce back.
Central banks in Europe, Japan, and China have started to copy the US playbook regarding monetary policy and are implementing their own versions of Quantitative Easing. Japan started late last year, China earlier this year, and the European Central Bank announced a program that started this week. While the magnitude of these programs is open for debate, these programs are all designed to stimulate each of their economies.
Lower energy prices will also stimulate international markets, maybe even more so than here in the United States. Americans spend about 2.2% of GDP on energy costs annually. In Europe, some countries are as high as 4% of GDP. In the emerging markets, we see levels near 6%.
Finally, while the strength of the dollar has negatively impacted returns over the last nine months, it has cheapened the price of goods and services overseas. It is now the cheapest it has been in over ten years to travel overseas and goods from Europe and Japan are much cheaper than they used to be. This has created a competitive advantage for international companies to export their goods to the United States. International economies are much more export intensive than the U.S. and should be the beneficiaries of the declining local currencies.
At the time of this writing the MSCI EAFE index is up 3% year to date, while the S&P 500 Index is down 0.5%. For the first time in the past five years International markets are outperforming the United States. We think that these next five years will be different from the past five years and that international and emerging markets could lead the way forward. We stand by our conviction in our healthy allocations to these markets.