- For almost a decade, the US market has outperformed both developed and emerging-market equities.
- If Biden reenters trade agreements like TPP, foreign stocks can outperform US stocks this year.
- Commodity exporters and Asian importers are primed to benefit the most, John Traynor says.
International equities could do better than their US peers if Joe Biden is successful in reengaging the US with the rest of the world from a trading standpoint, according to People’s United Advisors’ CIO John Traynor.
“Over the past several years, clients were questioning why they had global allocation to their portfolio, and we believe that those questions will be laid to rest this year,” he said.
For almost a decade, the S&P 500 has far outpaced foreign markets, both developed and emerging. From 2010 to 2019, the S&P 500’s annualized return was around 13%. The MSCI EAFE Index, which measures the performance of developed equity markets outside of the US and Canada, returned around 5.15% while the MSCI Emerging Markets Index only saw a 4% gain.
However, the trend might change, and international markets could do better this year than their US peers if the new Democratic president leading the largest economy in the world is successful in reentering trading agreements such as the Trans-Pacific Partnership, Traynor said.
European equities have rallied in February, fueled by positive vaccine news and strong earnings. And although many foreign developed economies are set to continue to do well this year, emerging markets could do even better, he added.
That's in part due to the declining dollar, which has seen its value stumble over the past 12 months. Usually, emerging markets are known to benefit from a stable-to-declining dollar.
Over the past year, the US Dollar Index has fallen about 9.2%. The index measures the value of the American dollar relative to a bucket of currencies and goes down when the dollar decreases in value compared to the other currencies.
Also part of the reason why emerging markets are set to outperform this year is the fact that China has been the world's winner when it comes to handling the pandemic.
The emerging market saw 637 million people travel domestically without any case spikes from October 1 to October 7 while the US and Europe kept on putting up a fight against a record number of cases.
As the first nation that effectively controlled the virus and the only major economy to have expanded in 2020, China could be a driving force for a lot of the developing economies around the world.
Focus on commodities-linked stocks
When dividing the emerging-markets asset class into two broad sectors of commodity importers and commodity exporters, commodity exporters can do well, and importers stand to do even better, he said.
Commodity exporters in Latin America and Africa that are producing a lot of raw materials can do well on the back of higher commodity prices. The Bloomberg Commodity Index has jumped 13% over the past year as the pandemic recovery and supply constraints in some products lifted prices.
Large commodity exporters include Argentina, which produces soybeans; Chile with copper, South Africa as the biggest platinum exporter, and Brazil with crude oil. The FlexShares Morningstar Global Upstream Natural Resources Index Fund tracks several raw-material extractors including Rio Tinto, BHP Group, and Newmont Mining Corporation, while providing indirect exposure to commodity prices.
But when thinking about the rate of change in economic output brought about by innovation and growing economic activity, commodity importers, primarily those in Asia, will do a little bit better, Traynor added. China is one of the world's largest importers of soybeans while Japan and South Korea import crude petroleum the most.