Will global markets outpace the U.S.?

Recent years have seen U.S. stock prices increase significantly.

But, “this level of valuation appears to be fair, if not slightly overvalued, for the short-term, based on historical averages,” says Jean-Baptiste Nadal, managing director and lead portfolio manager at Metropolitan West Capital Management in Los Angeles.

He adds: “U.S. companies are in good shape, [and] the economy is growing at a controlled pace with no sign of recession in sight. Plus, interest rates are low and are expected to remain low, while the dollar is strong and is likely to remain so for the medium term.”

Yet, U.S. market volatility may increase as the Federal Reserve considers raising interest rates. Investors can take advantage of that volatility, says Nadal, but it may also push people to make “some marginal portfolio adjustments away from U.S. equity markets, especially since there are new [global] opportunities starting to emerge.”

Decisions made by central banks around the world will likely also draw investment away from North America, Nadal predicts, citing stimulus programs from the Bank of Japan and the European Central Bank.

“So, while geographic diversification hasn’t worked for the past two or three years, it may be time for investors to increase exposure to regions of the world that have [previously] disappointed, such as Europe and emerging markets [….] Despite investors’ frustrations, diversification isn’t dead.”

Currently, “Europe … generates the most skepticism,” says Nadal. “But Europe […] it’s likely to surprise on the upside.”

In emerging markets, “long-term fundamentals remain strong. These are driven by demographics, improving infrastructure and rising GDP per capita.”

In fact, Nadal finds international markets could generate better returns than the U.S. in the short term. That’s partially because, in the next few years, “the U.S. market will be consolidating its formidable gains of the last five years.”