Broadly speaking, U.S. investors tend to prefer the comfort of home. In this sense, they are no different than investors in other countries, i.e. most investors have what is known as a “home country bias.” However, given that U.S. stocks are no longer cheap and less expensive alternatives can still be found overseas, it may be time for U.S. investors to look abroad for equity opportunities.

As I write in my new weekly commentary, last week U.S. stocks reached new highs and volatility hit its lowest level since before the recession, as an accommodative Federal Reserve (Fed) and a steady stream of mergers and acquisitions trumped escalating violence in Iraq. For the time being, the fighting in Iraq doesn’t appear to be threating the major oil fields in southern Iraq, which are responsible for most of the country’s oil exports, giving investors a reason to shrug off headlines out of the region.

Based on price-to-book metrics, U.S. equities are now trading at their most expensive level since late 2007, while equity market volatility as measured by the VIX is at its lowest level since early 2007, as the chart below shows.


Source: Bloomberg as of 6/19/14

While stocks still appear more attractive than bonds and cash, investors should be cognizant that U.S. equities are no longer cheap and, as the low volatility environment indicates, discounting little in the way of bad news. This means that U.S. equities may be particularly vulnerable to an exogenous shock, such as a deterioration of events in Iraq.

The upshot for investors: I suggest focusing new allocations on select international markets where valuations are less challenging. In particular, I like international developed equities in Japan and Europe as well as stocks in certain emerging markets.

Japanese equity valuations, for instance, are currently among the lowest in the developed world despite Japanese stocks’ recent advance. And as the chart below shows, Japanese and European stock valuations are both well below U.S. stock valuations on a price-to-book basis.


Source: Bloomberg as of 6/19/14

At the same time, there are a number of other factors supporting the case for Japanese stocks, including signs that key structural reform initiatives could regain momentum this summer. The government’s proposed growth initiatives due later this summer include a proposed cut in corporate taxes as well as several proposals to improve corporate governance. Meanwhile, recent market-friendly actions by the European Central Bank could help European stocks over the next few months.

Sources: BlackRock, Bloomberg

Investopedia and BlackRock have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by BlackRock, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of BlackRock and their Authors.

Related Articles
  1. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  2. Stock Analysis

    An Introduction To The Indian Stock Market

    Most trading in the Indian stock market occurs through its two exchanges – the Bombay Stock Exchange and the National Stock Exchange.
  3. Savings

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  4. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  5. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  6. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  7. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  8. Investing Basics

    General Agreement on Tariffs and Trade (GATT)

    The General Agreement on Tariffs and Trade was a treaty created after World War II that regulated world trade in an effort to aide economic recovery.
  9. Economics

    What is Dumping?

    Dumping refers to exporting a good at a lower price than the price charged for the good at home.
  10. Wealth Management

    How To Open And Access An Offshore Bank Account

    Opening an offshore bank account does not require a high level of financial sophistication. It’s a lot like opening an account at your neighborhood bank.
  1. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  2. Do mutual funds have CUSIP numbers?

    The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
  3. What is the difference between a greenfield investment and a regular investment?

    A greenfield investment is a particular type of investment where an international company begins a new operation in a foreign ... Read Full Answer >>
  4. What are the benefits for a company investing in a greenfield investment?

    Advantages of greenfield investments include increased control, the ability to form marketing partnerships and the avoidance ... Read Full Answer >>
  5. Why did China designated certain territories as special administrative regions?

    The primary reason for the People's Republic of China designating two territories as special administrative regions, or SARs, ... Read Full Answer >>
  6. What emerging markets are best positioned to benefit from growth in the utilities ...

    Emerging market economies expected to benefit the most from growth in the utilities sector include China, India, Brazil and ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center