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Eric Fry, highlighting opportunity overseas, reports...
One week ago, we suggested that investors "sell short the SPDR S&P 500 ETF Trust (NYSE: SPY) and then buy an equivalent dollar amount of the SPDR Euro Stoxx 50 ETF (NYSE: FEZ). This sort of pair trade is a classic 'convergence trade,' which succeeds if the valuations of U.S. stocks and European stocks converge toward one another...
"For several years running," we explained, "the U.S. stock market has been a one-directional market: Up. But maybe it is capable of moving in a different direction, like sideways... or even down. Who knows?
"What we do know is that U.S. stocks have been big winners, relative to European stocks, during the last five years. The S&P 500 ETF has doubled, while the Euro Stoxx has gained a miserable 6%, total - that's barely 1% per year."
But for reasons we detailed in last week's column, the performance gap between U.S. and European stocks seems likely to narrow over the months and years ahead. In other words, European stocks seem likely to outperform their U.S. cousins.
Rick Pfeifer, a senior portfolio manager at Fund Advisors of America, holds a similar outlook. In a recent interview with Alexander Green, The Oxford Club's Chief Investment Strategist, Rick laid out the case for lightening up on U.S. stocks and loading up on foreign ones.
Please check out the entire interview below...
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A Huge Opportunity Overseas
The U.S. stock market has given investors one heckuva ride the last six years. Large cap stocks have more than doubled. Small cap stocks have more than tripled.
Yet, one seasoned analyst makes a powerful case that the best returns in the near future will be generated elsewhere.
I recently spoke with Rick Pfeifer, a senior portfolio manager at Fund Advisors of America - an Orlando, Florida-based asset management firm. With almost 30 years' experience as a researcher and money manager, much of Rick's success is due to his global perspective, decidedly contrarian bent and unconventional viewpoint.
In particular, he insists that the "smart money" is investing overseas right now. And he makes a compelling argument. Here are just a few thoughts from a recent conversation we had:
Alex: Rick, the U.S. economy appears to be the only one worldwide that is firing on all cylinders. Economic growth is on the upswing. Job growth is the best since the 1990s. The dollar is strong. Corporate profits are up. And U.S. stocks are handily outperforming foreign ones. So why do you say investors should venture overseas right now?
Rick: Everything you say is true. The U.S. is in the best shape of any major economy. U.S. stocks have given the best returns. And not by just a little. Over the past five years, the S&P 500 has more than doubled the average annual return of Japan, Europe and Asia. Emerging markets have gone nowhere. And Latin American stocks have actually sunk an average of 4.8% a year for the past five years.
Alex: Indeed. The trend is your friend. So why buck it?
Rick: Hockey great Wayne Gretzsky said it best: "You don't skate to where the puck is - you skate to where it's going to be." History clearly shows that the U.S. market will outperform international markets for years. And then suddenly - without warning - international stocks will outperform domestic stocks for years. Get in early on that trend and you have the opportunity to earn outsized returns.
Alex: But China is slowing. Europe has Greece on its hands... and a potential currency crisis. Emerging markets are hurting from the stronger dollar and lower commodity prices.
Rick: Yes, yes and yes. But that's just the point. Bad news is good news for a dedicated value buyer. The investor who stepped up during the financial crisis in the U.S. a few years ago made out like a bandit. He bought when the outlook was ugly and now that it's much improved, he's sitting on big gains. That very same opportunity exists in international markets today.
Alex: Is it worth the risk?
Rick: The risk is not being in these markets. The risk is being out of them. Here's what I mean... By virtually every metric - price-to-earnings ratios, dividend yields, price-to-book value - foreign markets are way cheaper than U.S. markets. Lower valuations give you a higher margin of safety. In addition, a globally diversified portfolio is less volatile than a purely domestic one, since world markets don't always move in tandem. When the U.S. market is falling, foreign markets are sometimes rising.
Alex: How about the stronger greenback?
Rick: That's another reason to buy international equities. The strong dollar doesn't just mean it's cheaper to travel overseas. It's also cheaper to buy foreign-currency-denominated assets right now. And those assets are already super cheap. Take Britain, for example. This week, the FTSE 100 Index finally surpassed the peak it hit during the height of the dot-com boom more than 15 years ago! But earnings are double what they were at that previous high. You're getting twice the earnings at half the price.
Alex: Where else are you seeing value?
Rick: Look at Japan. The Nikkei stock index remains more than 50% below its 1989 peak. You're buying Japanese stocks today at half what they traded for 26 years ago. The banking crisis there is over. And free market reforms are finally stimulating this long-stagnant economy.
Alex: OK, give me some names. What are you buying now?
Rick: As you know, I can't reveal the latest "Buys" for our clients' accounts just yet. But I don't mind mentioning a few of the international names we've been holding: GlaxoSmithKline (NYSE: GSK), Vodafone (Nasdaq: VOD), Nippon Telegraph and Telephone (NYSE: NTT), Tata Motors (NYSE: TTM), BCE (NYSE: BCE), and Check Point Software (Nasdaq: CHKP), to name just a few.
Alex: Any thoughts when this big move will get underway?
Rick: Your guess is as good as mine. But given how cheap foreign stocks are and how long they have underperformed, the move - when it comes - should be dramatic. In the meantime, foreign shares yield considerably more than U.S. stocks. So the wait should be a comfortable one.
Alex: Thanks for sharing your thoughts, Rick.
Rick: Always a pleasure...
Rick offers a complimentary, no-obligation review of Oxford Club Members' portfolios, including "Buy," "Hold" and "Sell" recommendations. Feel free to contact him at 800.438.3040 or 407.667.4729.
Good investing,
Alex Green
Chief Investment Strategist, The Oxford Club
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