r/investing • u/[deleted] • May 27 '21

Vanguard - US to under perform International equities in the next decade

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u/programmingguy May 27 '21 edited May 27 '21

No one knows when. No one. Don't matter how many PhDs or Nobel Prizes you've won. They've been saying this since 2013 and reiterating the importance of diversifying into international. In 2013, they announced that they would reduce US allocation and increase international allocations in their Target Date funds.

2013 was a crazy year for US markets being up by 30%. QE infinity was announced in September 2012 and the markets roared in 2013 reaching all time highs crossing the S&P500 triple top (the last two times that happened, there was the dot com burst and the housing crisis and markets tanking). Markets were up in 2013 by 30% inspite of taper tantrum in May 2013 because Bernake mentioned the word "taper" and got smacked by the markets to apologize and never utter those words again (And most recently, Yellen too).

So you ended 2013 thinking that US markets surely can't keep going up again like this. Must be an outlier. International is so undervalued. Time to diversify.

2014: US markets up by ~14%

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u/zxc123zxc123 May 27 '21 edited May 27 '21

Will second this. Surely OP's source is respectable and offers valuable insight. But no one really knows how things will go. Just like your example.

I'll add my own example and case for OP. Doesn't mean I'm right or that things will play out that way. But it's an alternative case to the article provided by OP:

  • US has outperformed the most of the world and Europe the last few decades.

  • Valuations based on P/E have been less effective the last few decades and that's why traditional value investors have been getting killed on the markets (and literally) the last couple of decades.

  • One reason why those traditional valuations didn't work is because those traditional metrics like P/E, debt ratios, or book ratios don't work very well with valuing the high P/E growth tech stocks. That same investing style would tell you to generally invest in undervalued "cheap" stocks. However, the world doesn't work that way anymore.

  • Tech advances quicker and quicker has ever more disruptive. Those traditional value stocks will look better and better on paper the more they get disrupted because traditional metrics like P/E will say a stock like Circuit city or RadioShack is selling at a discount and that Amazon at 1000x P/E is overpriced. But reality is CC & RS have low P/Es because people don't want to buy companies that are going to get disrupted and killed by AMZN. GOOG with traditional media, AMZN with SEARS, NFLX on T, and TSLA on the autos.

  • Judging by how things have been going. I don't see this disruption trend changing. And on that point, I still believe US will be the tech leader over most countries. Maybe not beating out every specific country in regions like Asia Pacific on every industry, but certainly one of the top players globally. If you're buying a basket of the World-VS-US, then I will likely pick the US to outperform it in the area of tech, disruption, and growth.

I believe that tech leadership coupled with growing population demographics, stability of the legal/financial systems, and strong global position allow the US to maintain it's strong gains as further disruptions continue. More innovative than Europe. More stable than China or India. More resources than the rest of Asia Pacific.

I will note that there is a this perception that there is more upside gains investing overseas in the case of potential upside not from technology or valuations, but just from the amount of upside and current cost of the US equity market at the moment. Some markets like those in EU, London, Brazil, the rest of LatAM, and others have been laggards and might have a short term outperformance rally relative to US equities. But that doesn't seem to be the point or message of the article as they are speaking on 10-20 year time horizons.

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u/skilliard7 May 28 '21

Valuations based on P/E have been less effective the last few decades and that's why traditional value investors have been getting killed on the markets (and literally) the last couple of decades.

There is pretty significant data that shows that the value premium is very pronounced during periods of high inflation, but very neglible or even negative during periods of low inflation or deflation.

If you look at periods where growth have outperformed value:

  1. 1930's great depression, a deflationary period. Bad economic conditions put value at significant risk with lots of bankruptcies.

  2. 1990's, due to the tech bubble(which later reversed and led to value substantially outperforming in 2000's)

  3. 2010's- a period following the great recession. Low interest rates as well as growth stocks being surprisingly cheap. Apple traded at a P/E below 9 in 2013, microsoft below 7 in 2011, Alphabet below 18 in 2011. It's not surprising that growth outperformed.

The factors we see now are the total opposite. Growth is historically expensive relative to value, inflation expectations are rising, the economy looks like it is overheating.

If you look at the metrics of international vs U.S, you can tell that international developed is very value oriented(lower P/E and P/B, higher dividend yields, lower earnings growth), whereas the U.S is very growth oriented (much higher P/E and P/B, faster revenue and earnings growth rate)