Global Stocks: The USA Has Left the Rest of the World in the Dust ( Part 2)
In theory, markets should reward companies that post earnings growth and punish those that did not.
What actually happened over the last decade? Take a look.
Cumulative Total Return 2008-2018
Annualized Total Return 2008-2018
Note: ETF’s used to calculate total return from 12/31/2007 to 9/20/2018. Total return includes price performance and dividends in US Dollar terms.
ETF’s used included EEM (Emerging Markets), EWJ (Japan), SPY (US), EZU (Europe ex-US), and EWU (United Kingdom). These are suggested proxies for the underlying equity markets and not indicative on any recommendation.
Source: ycharts.com, iShares, and Ambassador Wealth estimates.
USA Dominates the World
What stands out is the performance of US stocks. Over the last decade (including the bear market of 2008), US stocks have done well. US stocks have yielded a cumulative return of nearly 150% over the last 10 years. On an annualized basis, the US has returned roughly 9% per year. Not only is that a decent return, but it places US stocks as the top region in the world over the last decade.
Some of the strong return performance of the US relative to ROW (“Rest of the World”) stems from superior corporate earnings performance. However, as we shall see in the next section, corporate earnings do not explain the total picture.
Europe and Emerging Markets Have Been Dull
In contrast, international markets have been relative losers. Emerging Markets, the UK, and Europe ex-UK have been practically flat over the last decade!
In the case of Europe and the UK, further declines in corporate earnings since 2008 have been a major culprit. Lower earnings compel investors less excited about paying much for them. Both Europe and the UK have heavy exposure to banks, which have seen dramatic earnings downgrades due to a host of issues, including low-interest rates and much stricter capital requirements following the Global Financial Crisis. Other regulated industries such as utilities and telecom have also suffered huge earnings declines. There are very few high-growth technology companies in European indices. Hence, the European markets have performed quite badly this decade.
Emerging Markets is more of a mixed bag. While performance has been similar to that of Europe and the UK, Emerging Market companies are sporting better earnings. Earnings have been more volatile and below their historic highs. Additionally, markets have questioned the quality of those earnings, given Chinese state-owned companies are a major part of Emerging Markets. Macro concerns about the impact of higher US interest rates on Emerging Markets, trade wars, and rising political risks in major countries have also been more of an overhang for investors than the attractiveness of specific companies.
Could the Sun Keep Rising in Japan?
Japan is also an interesting case. In spite of robust earnings that rival those of the US, returns have been only slightly better than its international peers. Part of it stems from skepticism on earnings in light of significant demographic challenges in the country (aging population, mature economy) and how much monetary policy has inflated earnings. On the flip side, Japanese companies have expanded their international operations, improved corporate governance, and funded higher dividends and share buybacks with cash, not debt like in the US.
Putting earnings and market performance together yields some interesting results. Read the next installment for some surprising conclusions.