4 min read

Market Update: "Non-US" Stocks Starting to Take Leadership?

Market Update: "Non-US" Stocks Starting to Take Leadership?
Photo by John McArthur / Unsplash

One thing that's becoming apparent to me is that the stocks of companies based outside the United States are starting to perk up in a big way in recent days.

In the goodBUYs portfolio, the top performers recently - a gold stock and an EV stock - are companies based outside the United States. In fact, I'm noting right how both were nicely higher yesterday, despite the US stock indexes taking a much-needed breather.

As I'll show in this article, the same is true for emerging market indexes across the board.

The reason for non-US stocks suddenly gaining strength is no surprise...and yet it could be the start of an important change that catches many investors off-guard.

Dollar Dominance - Until Now

After a year-long run, the value of the US Dollar (as measured against a basket of other major currencies in the form of the futures-traded US Dollar Index) has suddenly plunged:

Click to enlarge

Viewed by itself...not a big deal. I really don't pay that much attention to it.

The dollar moves up and down against the value of other currencies like the euro, yen, and yuan all the time. And the trend over the past 10 years has generally been higher.

But that's the thing about the USD...it has its cycles of strength - and weakness - that go on for years at a time.

When that cycle begins to shift in one direction or the other, it sets in motion powerful trends that can neutralize previously high-performing stocks and sectors - while raising others from the proverbial dead.

The best way to show that is by comparing the ups and downs of the US Dollar Index over the last 20 years or so, against an ETF like the iShares MSCI Emerging Markets Index (EEM).

The 2 indices are nearly positive/negative images of each other - when one is strong, the other is weak:

Click to enlarge

Shift Into International Stocks?

Given the sudden outperformance in non-US stocks in recent days, I wonder if we're seeing the beginning of another long-term shift from strength to weakness in the US Dollar?

Since late October, emerging market stocks have suddenly begun outperforming the Nasdaq by a significant margin:

Click to enlarge

If we compare a specific fast-growing industry - like a basket of tech stocks in the US versus an equivalent group of tech stocks in emerging markets - the sudden acceleration is even more dramatic:

Click to enlarge

Why would foreign stocks - fueled by a general trend of a weaker US dollar now and in coming years - suddenly start to outperform?

  • From a valuation perspective, major US stock indices are priced at premium levels, while non-US stocks and indices - ignored for the past decade and more - are cheaply valued.
  • Economic growth is faster in key emerging market regions like Brazil, India and Indonesia.
  • Likewise, population growth and demographics are more highly favorable compared to the US.
  • A trend of generally higher interest rates in coming years raises a lot of questions about the long-term sustainability of US federal budget deficits (and by association, US-based stocks) - perhaps making non-US markets somewhat more attractive by comparison.

To put it all in context...US-based growth stocks - led by tech companies like Apple, Microsoft, Google and others - have massively outperformed over the past 10 years, while emerging market indexes have literally gone sideways and made barely any gains at all:

But this chart below shows how - following the 2000-2003 dotcom tech bear market...emerging market stocks took off in a big way, while US-based tech stocks languished in comparison.

I know from long experience that the dominance of a stock, or stock index, often appears unstoppable when it goes on for years at a time. Yet such appearances are usually when the first cracks begin to show.

Leadership in the markets passes quietly from one group of stocks to another, while the majority of investors are barely aware of the change.