U.S. investors have had a lot to cheer about in the last few years, as domestic equity investment has paid off big-time.
However, it appears that that market has hit a bit of snag in 2015. There is increasing talk about how valuations for U.S. stocks are stretched, particularly in tech and biotech. The S&P 500 has a forward P/E ratio of 17.6, and the Nasdaq-100 is close to 19.2.
There’s also talk about how how earnings growth is challenged. As FactSet reports:
“For Q115, year-over-year earnings for the S&P 500 are projected to decline by 4.8%. If the index reports a year-over-year decline for the quarter, it will be the first time since Q3 2012 (-1.0%).”
Throw in a market that is basically flat since Jan. 1, and you can understand why investors are looking overseas.
If you’re wondering why — or if you should, too — here are three big reasons U.S. stocks are in trouble and foreign investments are in favor:
Weak Dollar Helps Foreign Stocks
Let’s start here because this is the easiest dot to connect. The strong dollar, driven by a comparatively robust U.S. economy and comparatively weaker economies abroad, is great news for Europe and China businesses that are reliant on exports.
The currency tailwind created by favorable exchange rates not only boosts profitability for foreign companies doing business in the U.S., but also makes American goods more expensive there — a win-win for domestic companies in regions with a weak currency.
China and Europe Bring Out Big Guns
It’s hard for some investors to understand why we should be banking on global markets right now. After all, Europe is still struggling and Chinese stocks for years had been mired in poor performance as the country’s growth expectations slowed.
But that’s the thing: Investors understand the challenges, and are now simply looking at turnaround potential.
Take China. Sure, the country just saw a disturbing surprise drop in exports. But that has many investors convinced that Beijing will bring out the big guns with a massive stimulus effort to revive the economy and inject growth into the system.
Absurdly, the negative macro news has actually pushed some Asian stock market indices to seven-year highs on optimism about Chinese governmental intervention.
As for Europe, the fears of a “Grexit” have been greatly reduced. And at the same time, the European Central Bank has embarked on its own asset purchases similar to the quantitative easing program we saw at the U.S. Federal Reserve — an ambitious plan that could re-inflate both the economy as well as European equities.
It’s hard to ignore powerful governmental intervention like this in Europe and China as a possible investment opportunity.
Just Follow the Money
If you’re wondering whether your fellow investors are buying into this global investing narrative, just follow the money.
U.S. investors are jumping ship big-time in 2015, with TrimTabs reporting that global equity mutual funds and ETFs saw $81.5 billion in inflows across the first three months of the year.
This big-picture report from TrimTabs validates weekly data from ETF.com that continues to put emerging markets funds at the top of the list of most popular funds. Consider that this week, ETF.com reported the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) saw the most inflows again, with two European funds — the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA:DBEF) and the Vanguard FTSE Europe ETF (NYSEARCA:VGK) in the Nos. 3 and 4 spots, respectively.
It seems that whether investors are looking for growth in emerging markets or value in Europe, they are looking anywhere but in U.S. stock right now.
If you’re interested in my favorite ways to play this trend, check out these five bargain investments to make in Europe now.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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