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Why Foreign Stocks Will Be the Post-Brexit Winners

By Brett Eversole
Monday, July 11, 2016

European stock markets suffered their worst day in years last month...
 
Italian stocks fell 13%. German stocks fell 7%. Spanish stocks fell 12%. On the other side of the world, even Japanese stocks took a hit, falling 8%.
 
The major crash was the result of the U.K.'s decision to leave the European Union (EU).
 
The decision caused ripples throughout the financial world. And the major decline in non-U.S. stock markets helped push foreign stocks to their lowest level EVER as compared with U.S. stocks.
 
As I'll explain today, this should lead to massive outperformance for foreign stocks in the coming years, based on history...
 
Foreign stocks have seriously underperformed in recent years.
 
The recent crash, thanks to the U.K. decision, is just an exclamation point.
 
Specifically, the MSCI EAFE Index – which holds stocks in developed markets outside the U.S., mostly in Japan and Europe – is up just 13% in the last five years. The S&P 500 is up 74% over the same period.
 
This has caused the MSCI EAFE-to-S&P 500 ratio to hit an all-time low. Take a look...
 

When this ratio is high, foreign stocks are outperforming U.S. stocks. And when it's low (like today), they're underperforming U.S. stocks.
 
Importantly, foreign stocks tend to dramatically outperform U.S. stocks going forward anytime the ratio is less than one. The table below shows the average forward returns of U.S. and foreign stock indexes during those times...
 
Index
3-Year
5-Year
S&P 500
-0.3%
7.3%
MSCI EAFE
35.3%
44.1%

U.S. stocks have actually lost money (not including dividends) three years after these rare instances. And they've only gained 7%, on average, over the next five years.
 
Foreign stocks have soared in comparison... returning 35% and 44%, on average, over the next three and five years, respectively.
 
Now, this doesn't necessarily mean that U.S. stocks have to perform poorly from here. I actually believe they can continue moving higher. Most folks have completely given up on the U.S. market, as we've explained in DailyWealth. That's not how stock markets peak.
 
But while U.S. stocks still have room to run, foreign stocks offer even higher upside. The major underperformance in recent years proves it.
 
Uncertainty from the U.K. decision to leave the EU crushed foreign stock markets. But that makes the long-term opportunity even better today.
 
No, we don't have an uptrend right now. But as a "hold your nose and buy" opportunity, foreign stocks are worth considering.
 
You can make this trade with one click through the iShares MSCI EAFE Fund (EFA).
 
EFA tracks the MSCI EAFE Index. And based on history, that's the exact group of stocks that will likely outperform U.S. stocks over the next few years. Check it out.
 
Good investing,
 
Brett Eversole




Further Reading:

Brett and Steve recently returned from a trip to China. While they were there, they learned about a place where dividend yields are higher than price-to-earnings ratios. Learn about this incredible opportunity here.
 
European stocks are only one corner of the market where Brett and Steve see value today. Last month, they shared an idea with 110% upside over the next two years. Read more here: The Worst Commodities Bust in Generations Is Over... Time to Buy!

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Amazon (AMZN)... online retail
AT&T (T)... telecom
Lockheed Martin (LMT)... "offense" contractor
Raytheon (RTN)... "offense" contractor
Consolidated Edison (ED)... utilities
ExxonMobil (XOM)... oil
Altria (MO)... tobacco
Philip Morris International (PM)... tobacco
Campbell Soup (CPB)... soup
General Mills (GIS)... food
PepsiCo (PEP)... soft drinks
Sysco (SYY)... food products
Clorox (CLX)... consumer goods
Becton Dickinson (BDX)... health care devices
Johnson & Johnson (JNJ)... health care products
Medtronic (MDT)... health care devices
UnitedHealth (UNH)... health care insurance
Barrick Gold (ABX)... gold miner
Franco-Nevada (FNV)... gold royalties
AutoZone (AZO)... auto parts
Dollar General (DG)... discount stores
Dollar Tree (DLTR)... discount stores
Automatic Data Processing (ADP)... payroll processor
Paychex (PAYX)... payroll processor
Pool Corp (POOL)... pool supplies

NEW LOWS OF NOTE LAST WEEK
 
Fiat Chrysler Automobiles (FCAU)... automaker
Honda Motor (HMC)... automaker
Deutsche Bank (DB)... German bank
Lloyds Banking (LYG)... British bank
Royal Bank of Scotland (RBS)... British bank
Valero Energy (VLO)... oil refiner

premium teaser

My proprietary screens point to Japanese stocks today...
 
Many markets fell after the U.K.'s vote to leave the EU. But the best opportunity might be in Japanese stocks.
 

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