Ben Griffiths, CFA is manager of the T. Rowe Price International Discovery Fund (PRIDX), whose 10-year annualized return of 11.5% ranks in the top 15% of its category. TRowePrice.com
The S&P 500’s performance nearly tripled that of the rest of the world over the last decade and is up a remarkable 86% since its March 2020 lows. But top fund manager Ben Griffiths, CFA, says that investors counting on more big US stock gains are missing out on a better bet—many foreign economies will experience similar, sharp recoveries, and their stocks are much more attractively priced now.
While the US economy is forecast to grow 6.5% in 2021, the gross domestic product (GDP) worldwide is projected to rise nearly as much—by 6%—and emerging markets even more, by 6.7%. The same forces driving up US stocks exist in most countries to varying degrees, including aggressive monetary and fiscal policy, positive COVID-19 vaccine news and loosening pandemic restrictions.
Griffiths also points to other factors that justify the common wisdom that US investors should keep a portion of their portfolio in overseas shares, especially if you are heavily overweighted in US stocks now. These include…
Bargain prices and more room to grow. The price-to-earnings ratio (P/E) of the S&P 500 is 22.4 versus 19.3 for the MSCI ACWI ex USA Index (a large- and mid-cap index covering 22 developed markets outside of the US and 27 emerging markets).
Weakening US dollar. It’s already fallen 9% against major foreign currencies in the past year, and many analysts think the trend will continue due to high federal deficits. A weaker dollar benefits investors in foreign stocks because they are worth more once converted back into US currency.
Bottom Line Personal asked Griffiths to explain his strategy for putting money to work overseas and which stocks he finds most attractive now…
The areas of the US stock market that have done well this year provide a playbook for how to invest in foreign stocks. Steps I’m taking now…
Buy high-quality small-cap and midcap growth stocks. Smaller companies historically outperform during bouts of economic acceleration, and they are more undervalued now than their large-cap counterparts. The companies you own should have solid balance sheets, significant market share and high barriers to entry into their industry niche. Innovation is key—health and life sciences…tech, both hard tech such as leading-edge semiconductors and consumer Internet companies…and consumer brands. We can find great companies in these areas outside the US.
Rotate into stocks that benefit from the reopening of economies. Lighten up on holdings in areas that soared last year, such as e-commerce and health care. They will not continue to grow at the same rapid pace once life gets back to normal. Instead, consider high-quality “growth cyclical” stocks in beaten-down areas of the market such as travel, traditional retail and global shipping.
Look for areas of the world where the rebound is likely to be strong and valuations are reasonable. On a country basis, my fund is most overweighted in the UK and China. The British economy is expected to grow 5.3% in 2021 thanks to one of the world’s fastest vaccination rollouts. Many beaten-down British stocks will benefit now that trade issues have finally been resolved over Brexit, the UK’s secession from the European Union. In China, expected 2021 GDP growth is 8.4%. I realize some investors are wary of owning Chinese stocks given global and political tensions. But regulators there have focused on giant tech companies that have grown into virtual monopolies. Tighter regulations have not affected the smaller industrial and cyclical growth stocks that I focus on. In addition, while some regions I like, including Mexico and mainland Europe, will require patience because their economic recoveries will take longer than the US, these Chinese stocks offer attractively priced opportunities.
Owning one or more of these stocks may help boost your overall portfolio returns in the coming years…
Amplifon (AMFPY) sells hearing-aid devices through a network of more than 11,000 retail stores in 27 countries. Based in Italy, the company owns a variety of hearing-aid brands including Miracle-Ear in the US. An estimated one out of every three individuals globally over age 65 have some degree of hearing loss, and many of them have put off seeking treatment during the pandemic. Amplifon is consolidating this attractive growth industry and now commands a 12% global market share. Recent share price: $1.84.
Ascential (AIAPF) is an event-services powerhouse. Headquartered in London, it organizes global exhibitions, conferences and festivals such as the Cannes Lions festival on the French Riviera and the World Retail Congress. It also helps corporate clients shape and promote their brands at trade events such as the Las Vegas Consumers Electronics Show. With most live events canceled last year, revenues at the company fell 31%. But Ascential will see rapid growth in its marquee events as pandemic restrictions continue to ease. Also, recent major acquisitions are helping Ascential build its digital-analytics business, advising companies how to brand and strategize online. Recent share price: $4.66.
Dechra Pharmaceuticals (DCHPF) is one of the world’s largest producers of veterinary medicines and over-the-counter pet pharmaceuticals. The British company has a robust pipeline of new products and thousands of existing ones ranging from surgical anesthetics and treatments for heart and kidney diseases to antibiotics, vaccines, dermatological products and weight-management meals. Animal adoptions have surged during the pandemic, and owners are spending more money on their pets. Worldwide, the pet health-care industry is expected to grow 6% annually and reach $70 billion a year by 2025. Recent share price: $54.80.
Grupo Aeroportuario del Sureste SAB de CV (ASR). This Mexican company expects that 50 million passengers could pass through the nine airports it operates including ones in Cancún, Puerto Rico and Colombia. The company managed to be profitable in 2020 despite a 54% drop in traffic. It’s a lucrative, long-term business model because the airports function like tollbooths, collecting revenue by charging fees for passenger throughput, allowing aircraft to access its facilities and leasing space to car-rental companies, restaurants, retailers and advertisers. Regional malls may have been squeezed by e-commerce, but Grupo Aeroportuario del Sureste has the benefit of a captive audience. While traffic normalization will depend on the speed of the vaccine rollout, the airport operator saw a strong rebound in domestic Mexican travel (up 11% year over year) in March 2021. Recent share price: $186.43.
Thule Group (THUPY). The Swedish company manufactures sports and outdoor leisure products including bicycle and roof racks for automobiles and RVs, travel luggage and backpacks, and strollers and bike trailers for kids. Although not as well-known in the US, Thule products have a cultlike following in much of Europe. The stock will benefit from pent-up consumer demand as the pandemic fades, as well as because many families will continue to opt for “staycations” and short trips with activities in their local areas. Recent share price: $22.27.
Yangzijiang Shipbuilding (YSHLF) is China’s largest private shipbuilder and the fifth-largest in the world. Global trade growth is expected to rebound 7% to 8% in 2021. Although company revenues fell 37% in 2020, Yangzijiang has received more than $4 billion worth of orders over the past year for 75 vessels including oil and chemical tankers and TEU containerships, the biggest cargo carriers in the world. Recent yield: 4.9%. Recent share price: $0.69.