International Equity

Markets around the world have given us eye-popping returns year to date. For 2009, the MSCI All-Country Index was up 33% through the end of November, with individual markets up considerably more. To name a few, Norway was up 80%, Belgium up 60%, Sweden up 67%, South Korea up 59 %, Turkey up 66%, India up 96%.*

Current Outlook and Opportunities
As we stated last year, since 1970 the MSCI World Index has returned on average 130% over the five years following the trough of a crisis. Assuming March 2009 was the trough, the MSCI World has rallied 60%. If this rally behaves like other rebounds from past crises, we potentially have at least another 70% to go in the equity markets over the next several years.*

So far most of the rally has been driven by multiple expansion – rising prices reflected in rising price-to-earnings ratios. That is, the price of the market has increased but earnings have not. In fact, earnings in most countries have fallen during the crisis. The multiple expansion is based on the bet that the economy will improve, and that corporate profit growth is just around the corner. Since the beginning of 2009, the price-to-earnings growth in the U.S. has risen from 14x to 27x, Germany from 10x to 28x, Sweden from 9x to 22x, South Korea from 9x to 24x, Brazil from 8x to 16x.

In order for the world markets to continue on their upward trend, corporate profit growth will have to be vigorous and inflation mild. During 2009, any modest earnings growth has been produced by cost-cutting. We expect that some of the profit growth will start in 2010. Analysts are forecasting earnings to grow strongly in 2010. For example, earnings are forecast to grow at 24% for the developed markets and 20% for the emerging markets. (Source: Global I/B/E/S)

Last year we were looking at very many inexpensive markets. Today it is harder to find markets which are inexpensive on an absolute basis. However, there are some markets on a relative as well as absolute basis which look attractive. Some are in the developed markets and some are in the emerging markets. Within the developed markets of Europe, Italy and Spain are trading at a forecasted price-to-earnings ratio of 12x, which on a relative basis is inexpensive. In the emerging markets, some attractively priced markets are Turkey with a forecasted price-to-earnings of 8x and South Korea at 9x. In addition, some of last year's cautionary notes about emerging markets, including credit conditions have improved. Sovereign yields over U.S. treasuries narrowed over the last year from averaging 690 basis points (bps) over U.S. treasuries to now 280 bps over treasuries. Risks, however, remain in the credit markets as witnessed by the suspension of debt payments by Dubai World. Deleveraging will take several years more.

Although we cannot expect that markets will return 30% every year, we believe it is important to remain invested in the markets in order to take advantage of the next leg of the market rally whenever it may come.

In spite of the global financial crisis, much of the equity marketplace continues to expand globally. We believe there are enormous opportunities now. It is a very exciting time to be considering investing in the global markets. We urge you to look seriously at these opportunities in international investing and welcome the opportunity to discuss international investment strategy with you.

 

* Past performance is not indicative of future results.