Overseas investing during a trade war

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Q. What do you think will happen to the stock market with all the new Trump turmoil? Are there opportunities in overseas investing?
— Investor

A. There has been – and continues to be – a lot of noise coming out of Washington in 2018.

The introduction of tariffs has sparked concerns of an all-out trade war, causing markets to stir a bit more than they have the last couple of years.

What have we seen?

In the first quarter, international stocks outperformed U.S. stocks, said Bryan Smalley,a certified financial planner with RegentAtlantic in Morristown. That reversed through the second quarter as domestic companies performed strongly.

“As thoughtful investors, we must remember to look away from the headlines and focus on the underlying factors that play into the market,” he said. “The economy and company profits continue to grow, while unemployment and inflation remain tamed.”

Furthermore, he said, the tariffs imposed are small relative to the economy as a whole. As with any other time or event, we never know what will happen in the short-term, but these characteristics seem beneficial to the markets over the long run, Smalley said.

Historically, having a globally diversified portfolio – investments in both domestic and international companies – has not only enhanced returns, but has mitigated risk as well, he said.

“Nobody wins a trade war, but certain economies may experience more damage than others,” Smalley said. “We have no way of knowing which countries may be most impacted, so we choose to maintain exposure around the globe. Doing so should help to dampen the volatility, or huge movements in stock prices, of certain regions.”

Looking ahead, Smalley said he continues to see opportunities overseas for a number of reasons.

First, valuations. Smalley said one way to measure the value of stocks is by their Price to Earnings (P/E) ratio. This illustrates how much an investor pays in stock price for every dollar a company earns. The lower the ratio, the cheaper the stock, he said.

“International stocks continue to trade at more attractive levels than their U.S. counterparts,” Smalley said. “Emerging markets in particular look very attractive, but keep in mind that they are riskier to invest in.”

Then there’s earnings growth. Smalley said both developed markets overseas and emerging markets have shown strong earnings growth in 2018.

“U.S. companies have also experienced significant earnings growth, though part of this can be attributed to the corporate tax cuts introduced in the Tax Cuts and Jobs Act,” he said. “International companies do not benefit from this, proving that their growth is more organic.”

Then there’s the economic recovery.

Smalley said since the market crash, we have been in a long, slow economic recovery.

“The U.S. has lead that recovery over the last decade while the economies of foreign countries have lagged behind,” he said. “Since they are earlier in their recoveries, it is likely that economic expansion in foreign countries has longer to go and may outlast that of the U.S.”

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