2024 Market Outlook

February 1, 2024

Little Need To "Travel" Abroad With Your Investable Assets

John Bonnanzio

With increasing frequency, family, friends and fellow empty nesters are traveling abroad. One survey found that a record one in five Americans have plans to do so. Among other things, this suggests Covid is further in the rearview mirror while consumer balance sheets are healthier. Notably, rising wages, falling inflation, low unemployment and an otherwise stronger-than-expected economy have lifted the Conference Board’s Consumer Confidence Index to a two-year high. And, importantly, there’s the so-called wealth effect. With the S&P 500 back in record territory, recovering financial markets have Americans feeling more financially confident. The most optimistic are those age 55-plus. Indeed, that demographic controls 74% of U.S. investable assets.

Switching gears a bit, when investors feel confident and have extra money to invest, their behavior morphs: they tend to put more of it into riskier asset classes. Most recently, billions of dollars have flowed into newly launched bitcoin ETFs. But historically, enriched investment coffers have resulted in larger asset flows into high-yield bonds, gold, and foreign funds, including the emerging markets.

While some international Fidelity funds have plenty of upside potential, including the benefit of portfolio diversification (risk reduction), for the year ahead, U.S. stocks still provide the most attractive balance between risk and reward. One measure of that view are this month’s seven international fund downgrades. Prior to that, only three warranted Buy ratings, and now that’s down to two. Granted, more than two dozen International funds are still rated OK to Buy. But those more tepid endorsements are, in part, the result of the funds’ potential relative to suitable U.S. counterparts.

In macroeconomic terms, much of the investable world seems poised to experience what the U.S. is now experiencing economically — a soft landing. That suggests low, real (after inflation), single-digit growth and moderating inflation.

Though not shown in the table, The World Bank projects global growth to remain this year at 3.1%; next year, real growth could tick higher to 3.2%. While that’s higher than the U.S. (which is growing faster than any other G7 economy) and Europe, these measures are far from the only considerations in making good investment decisions.

To that end, we’re unabashedly pro-U.S. stocks. Yes, there are many fine foreign companies to which some "domestic" stock funds we favor have exposure. For example, Equity-Income is 12% foreign, holding such multinationals as AstraZeneca and Taiwan Semiconductor. But for us to hold a foreign stock fund in a model portfolio, there must be a higher bar, otherwise we prefer to have Fidelity managers do that heavy lifting.

Real GDP Growth

Let’s first consider Japan Smaller Companies.

Held in our Unique Opportunities Model (which is best followed by more risk-tolerant investors), it is the only international fund we own. With slow-moving economic reforms set in motion by former Prime Minister Abe, stocks have been gaining ground for years. Still, they remain inexpensive (which has caught the attention of Warren Buffet), especially when one considers that they’re still trading below the all-time high set by the Topix index back in 1990! Also, Japan’s deflationary era is ending, and a new era of (slightly) positive interest rates are emerging with positive GDP growth. And, after decades of paying lip service to shareholder returns, buyback activity has surged.

For investors desiring a more geographically diversified option, we favor Int’l Capital Appreciation. Managed since 2008 by Sammy Simnegar, he’s one of the industry’s best foreign stock fund managers. (He has also run Magellan since 2019.) Though Sammy’s fund is 21% more volatile than Int’l Index, last year it handily outperformed it: up 27.6% versus 18.3%.

Because most U.S. stock funds have some overseas exposure (more than a third of Low-Priced Stock is outside the U.S.), as noted, our models have exposure to many of the world’s best foreign companies. As such, there’s typically little need to venture abroad directly, unless, of course, we’re vacationing!

— John Bonnanzio