My Hill to Die or Thrive On In 2024

Listen to this post

Happy New Year, TradeSmith Daily!

A new year is an exciting time…

We have resolution goals to hit, projects to start (or finish)… And for financial writers, it’s tradition for the bravest among us to stick our neck out with a prediction for the year ahead…

So that’s what I’ll do. Today, I’ll make what I think is a well-reasoned call on the investment niche I think will do well this year…

And at the end of the year, either shout “I told you so”…

Or take my lumps, dust off my shoulders, and try again next year.

It’d a bold thing to do, making predictions. The stock market bends for no man. I have great respect for all the analysts at TradeSmith and LikeFolio who’ve spent the last week going public with their own takes, and I think all of them have merit. (Catch up on those here if you aren’t already.)

But we can’t let the TradeSmith Roundtable have all the fun.

I haven’t yet shared this idea in TradeSmith Daily. We’re not talking about bitcoin, or nuclear energy, or oil again. (Though I maintain all of those will do well next year, too.)

Let me show you my brand-new big idea for 2024, and potentially well beyond it…

Going International

My big call for 2024 and beyond is that international stocks will outperform U.S. stocks.

And the leaders among this group will produce near-unfathomable returns.

Here’s why I think so…

We’re already starting to see international markets pick up. From August 2022 to now, the S&P 500 has returned about 14%. But some standout foreign markets have done heaps more. Like Turkey (TUR), whose ETF has returned 73%… Or Argentina (ARGT) — that ETF returned 88%.

And despite this, even when it’s right in front of people’s faces, 99% of investors won’t take part.

There are two core reasons why I believe the stocks will outperform:

1. International stocks often go on long stretches of U.S. stock outperformance, which we haven’t seen in many years, but started in 2022.
2. International stock valuations are much, much cheaper than their U.S. counterparts.

And the reason I believe most investors won’t participate — probably even most of the investors reading this — is due to a powerful home country bias.

Let’s take each factor one at a time.

1. International stocks are already “beating” U.S. stocks…

You may find it hard to believe after 2023, but it’s true. On the whole, international stocks are already starting to outperform U.S. stocks.

Don’t take my word for it. Check out this chart from JP Morgan’s Guide to the Markets… The data shows that, going back to the ’70s, the MSCI EAFE (European, Australian, Asian, and Far East) Index goes through long-term periods of outperforming the MSCI USA Index. Those periods are marked in purple on the chart above; the gray is when U.S. stocks outperform the others.

These periods of outperformance have lasted about four years, on average, since the 1970s. U.S. outperformance has lasted about 6.5 years on average over the same period.

With the most recent period of U.S. outperformance lasting more than double that, at 14.2 years, imagine how hard the pendulum could swing back the other direction.

And at the time of the report’s publishing in late September, it already has started. International stocks lost less than U.S. stocks from the two years between September 2021 and 2023. And if this sustains until April, we’ll have an official “regime change” according to JP Morgan.

That’s how the regime change in 2001 began, after the dot-com bubble burst. Then, international stocks outperformed by 65% until 2007.

Understand, this doesn’t mean U.S. stocks will fall during this time. It just means foreign stocks could do better.

If the MSCI USA Index returns 100% over the next 10 years — roughly in line with long-term performance — and foreign stocks outperform in the same way they did in the early 2000s, they’ll return 165%.

That alone should convince you that putting part of your portfolio into foreign stocks is a good idea. But let’s look at the stark difference in valuations for the cincher.

2.International stocks are cheaper, too…

And not just a little cheaper. A lot cheaper.

Take a look at this… The chart on the left shows the difference between the current 12-month forward P/E ratio between the S&P 500 and the MSCI All Country World ex-U.S. Index. On the whole, international stocks are about 33% cheaper than the S&P 500.

It’s worth noting that over the last 20 years, international stocks tend to have just a slightly lower valuation than the S&P 500: 13.1x versus 15.6x. So while we should expect international stocks to be somewhat cheaper, 33% cheaper is an anomaly.

And in a slight but not insignificant boon to the international stock argument, the average dividend yield is 1.8% higher, too. That’s the chart up there on the right.

So, ahead of what may be a period of international stock outperformance, they’re also about 33% cheaper and paying out slightly higher dividends. That should attract any investor with an eye toward value.

But for most, it simply won’t.

3.Home country bias is a powerful force…

No matter where you are in the world, odds are good that you tend to invest primarily in your own country. This chart from Vanguard shows the dynamic in action — of major developed countries, their slice of the global investment pie, and where their investors put their money: U.S. markets contribute more than 50% of global stock indexes (orange bars), and its investors weight over 79% of their investment in domestic equities (yellow bars). If you’re doing that, congratulations… It was the right move over the last decade.

But many countries are guilty of home country bias. Canadian investors, despite contributing just 3.4% to the global index weight, invest in their own stocks by 59%. In Australia, it’s even more extreme.

This bias is natural – we all do it. Probably more than 90% of my individual, active portfolio is in U.S. stocks. And my retirement accounts are all-in on the S&P 500.

But if we’re entering a period of outperformance for international stocks, we need to strongly consider bucking this bias and putting more exposure elsewhere.

So here’s what I’m going to watch…

My Hill to Die or Thrive On

I’m going to closely watch and track the Vanguard Total International Stock ETF (VXUS) this year.

This is one of the most broadly invested international stock ETFs that don’t include the United States. Here’s the portfolio allocation, courtesy of Investopedia:

• Asia-Pacific (45%)
• Europe (39%)
• N. America (7%)
• MidEast & Africa (2%)
• Latin America (2%)

The top 10 countries the VXUS is invested in include Japan, the U.K., Hong Kong, Canada, France, Switzerland, Australia, Germany, Taiwan, and India.

This fund also has an expense ratio of just 0.07%, making it an efficient vehicle to own.

But I’m not stopping there.

Throughout the year, I’ll research and invest in individual foreign stocks that I believe hold good value, are growing fast, and don’t hold substantial regional risk. Among the markets I’m most interested in are India, Argentina, and Japan. I’ll be looking for stocks there.

And of course, I’ll be using the TradeSmith best-in-class tools to uncover them. Not to mention the wise counsel of the analysts we’ve been hearing from over the last week.

International stocks are my hill to die or thrive on in 2024. But as always, I’m eager to hear what you think.

Is there a blind spot to this idea that I’ve missed? Or do you have your own prediction for 2024 that you’d like to share?

Write me at [email protected], and I’ll look to share your thoughts your fellow readers. To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily