The Clock Is Ticking On U.S. Outperformance

Apr. 23, 2020 6:58 PM ETECH, EPOL, EWI, EWP, EWS, EWU, EWW, EWY, GXG, IDX, NDX, RSX, SPY, TUR9 Comments
Stuart Allsopp profile picture
Stuart Allsopp


  • The valuation gap between international and U.S. stocks is at levels not seen since 2000; a period which resulted in 20+% annual international equity outperformance.
  • The correlation between valuations and subsequent returns becomes incredibly tight over a multi-year horizon, with the R-squared rising to 0.97 over a 10-year period.
  • Currency performance should turn from a headwind to a tailwind for international stocks as real effective exchange rates should mean revert thanks to high and rising real yield spreads.
  • Real GDP growth is also likely to outperform across international economies which boast higher savings rates, fewer economic distortions, and stronger demographics.
  • We expect annual real total return outperformance in international stocks to range between 14.4% and 20.5% depending on the ultimate level of valuation mean reversion.

The oil price crash and global lockdowns have pushed the valuation ratio of international to U.S. stocks to levels not seen since 2000. Back then, the combination of a U.S. Tech bubble and Emerging Market crises resulted in 20+% annual international equity outperformance for the next decade. We estimate that our basket of diversified, developed and emerging international stocks should outperform by similar amounts over the next 10 years.

Investors are likely to look back in years to come and ask themselves why they were paying almost four times more for U.S. equity relative to the rest of the world at a time when the U.S. economy faced relative weakness and the dollar faced major policy-driven headwinds.

Fig. 1

Source: Bloomberg

The above chart shows our long and short portfolios. We are short an equal weighting of the SPX and the NDX and long an equal weighting of a number of international markets that trade at deeply discounted valuations and have undervalued currencies. Specifically, the U.K., Mexico, Chile, Colombia, Italy, Spain, Poland, Czech Republic, Turkey, Russia, Korea, Singapore, and Indonesia.

Valuation Divergence Suggests 20% Annual International Outperformance

The following chart shows the average of the price-to-book ratio and the price-to-sales ratio for our long and short baskets on the left hand side, with the long basket now trading at its weakest level on record and the short basket still trading above its 2007 peak. On the right-hand side is the current trailing 12-month dividend yield of both indices which shows a similarly large divergence.

Fig. 2

Source: Bloomberg

As dividend payments tend to fluctuate more aggressively than sales or book values, we use the payout-adjusted dividend yield (see 'Global Equity Outlook: The U.S. Versus The Rest') as a way of adjusting the trailing dividend yield to a yield figure

This article was written by

Stuart Allsopp profile picture
I am a full-time investor and owner of Icon Economics - a macro research company focussed on providing contrarian investment ideas across FX, Equities, and Fixed Income based on Austrian economic theory. Formerly Head of Financial Markets at Fitch Solutions, I have 15 years of experience investing and analysing Asian and Global markets.

Disclosure: I am/we are short SPY, NDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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