Look Beyond America's Borders in the Second Half

Halfway through 2017, stocks outside America are leading. European stocks, in particular, have been buoyed by the bullish cocktail of falling political uncertainty, continued economic expansion, improved corporate fundamentals and warming sentiment.

In my view, this is just the beginning of a sustained period of non-U.S. stock leadership. Global investors should act now.

The first quarter's non-U.S. outperformance surprised many, as most market forecasters believed the U.S. would add to its four-year streak of wins. However, history shows non-U.S. stocks typically outperform in U.S. presidential inaugural years.

Moreover, since 1929, when non-U.S. stocks outperform in the first quarter of inaugural years, they continue to outperform in the second half more than 90% of the time, with 1973 being the one exception.

History shouldn't be your only tool when forecasting markets, because there is another powerful phenomenon at work: Stocks disdain rising uncertainty and thrive when uncertainty falls.

At the start of 2017, European political uncertainty was peaking. With elections in the Netherlands, France and Germany, to name a few, investors feared a populist uprising with some speculating the euro could unravel. Now, with most elections concluded and anti-EU populist parties faring poorly, falling political uncertainty is boosting eurozone stocks more than most expected to begin the year.

German federal elections remain, but current polls as well as recent regional elections suggest pro-euro parties will prevail. Additionally, Austria will vote in an October snap election and, while the euroskeptic Austria Freedom party is presently polling well, it still lacks majority support.

The most probable outcome: another gridlocked, coalition government.

Finally, Italy is always a political wild card, but few are panicking over the populist Five Star Movement, and its chances for success look slim. Considering eurozone stocks outperformed amid worries about Europe's political future, consider upside potential with many of these issues in the rearview mirror.

Besides politics, there are other fundamental reasons to expect non-U.S. stocks, particularly those in the eurozone, to do well.

European corporate earnings are expected to surge 30% this year with financials' earnings growing a staggering 40%.[i] The currency bloc has notched 16 straight quarters of positive GDP growth -- a largely underappreciated fact.

Manufacturing and services Purchasing Manager's Indexes are near five-year highs, having surged past similar figures in the U.S.

The Conference Board's forward-looking Leading Economic Index is high and rising, accompanied by accelerating real estate prices across the region. Many media, policymakers and even central bankers describe a eurozone "recovery" needing help, despite the fact the economy has been in expansion since 2015 and looks likely to continue.

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Among eurozone financials, steepening yield curves are coinciding with improvement in banks' willingness to lend (a good sign for future loan growth) -- this against a backdrop of improving non-performing loans and all forms of bank capital at historically high levels.

Considering broad expectations toward the Continent still remain low -- especially relative to the U.S. -- it shouldn't take much for Europe to continue to surprise to the upside.

While leadership rotations are difficult to time precisely, plenty of positive drivers exist for stocks outside the U.S. Global investors should look to capitalize on these bullish developments before sentiment and the rest of the world wakes up to economic and investment realities abroad.

[i] Source: FactSet, as of 6/27/2017. MSCI Europe and MSCI Europe Financials earnings estimates for full year 2017 in USD.

This article was originally published on July 5, 2017.

Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit www.fisherinvestments.com.

The content in this article represents only the opinions and viewpoints of the author. It should not be regarded as personalized financial advice and no assurances are made the firm will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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