If your clients are concerned about opportunity and volatility in the U.S. equity market, consider exploring internationally. We’re providing talking points and solutions to share with your clients.

Wayne Badorf: If your clients are concerned about opportunity and volatility in the U.S. equity market, consider exploring internationally. We’re providing talking points and solutions to share with your clients. I’m Wayne Badorf, and this is The Essential Practice podcast.

We’re continuing our conversation on “Managing for the ‘what ifs’” in the equity markets. And with us again is Jeff Doinoff, equity strategist with Wells Fargo Asset Management and author of the “Managing for the ‘what ifs’” presentation. Jeff, welcome.

Jeff Doinoff: Thank you, Wayne. Good to be here.

Wayne: Just a quick program note—if this is the first program you’re listening to—it is a two-part series, so be sure to listen to part 1 where we focused within the domestic U.S. by suggesting that investors “pick your spots domestically” as a means to help allay concerns clients have regarding U.S. stocks.

But in this program, we’re suggesting clients look outside the U.S. and consider exploring internationally.

Well, that’s not going to be an easy conversation though for an advisor to have with their client. So let’s talk about how they’d get that conversation started.

Jeff: Sure. Many investors are likely to be underweight their longer-term strategic allocation to international equities. While we certainly acknowledge this is not easy to do, because when you get these opportunities, there are likely to be during times where there are challenges—hence, why the opportunity may actually exist.

Wayne: Right.

Jeff: In such times, you must be willing to trim what has worked and add to what has not.

Wayne: Okay. So what we’re really talking about is that it’s not about necessarily just buying U.S. or just buying international, but having the right mix and the right balance.

Jeff: Right.

Wayne: Jeff, help us understand why international looks good in our view.

Jeff: So, for international, today, we believe, quite simply, the price to value looks attractive. There certainly may be known challenges, but the price is largely reflective of that.

Wayne:  Can you back that up for us… how’d you come to that conclusion?

Jeff: Absolutely. It’s based on the fundamental building blocks of returns, and you can really break that down into 3 basic components. First is the dividend yield—we’re starting at a currently average to above average dividend yield. Second is earnings growth and the opportunity for earnings to return to their prior peak. The S&P 500, for example, is well above its prior earnings peak, whereas the International markets are still well below their respective peaks, yet with the positive unpinning of global growth. And then lastly is the valuation component. Internationally, on a price to earnings basis, they are average to below average and at a greater discount to the S&P 500 than historically. So, part of our job is to inform investors as they are contemplating future return expectations and, therefore, what their allocations may and should look like.

Wayne: Alright… well this has been sort of the numbers view of international. But, there appear to be some big challenges. And in the minds of many of our listeners it’s probably around tariffs and trade.

Jeff: Wayne, you are absolutely right, but the market often reacts as if they are put in place and will stay in place forever. And even if that were the case, which I believe would be most unlikely, the underlying business that you are buying are effectively living, breathing organisms that will adapt and change to minimize the profit disruption, because they are incentivized to do so. And so it really goes back to many international companies, similar to U.S. based companies, are global in nature and have widely diversified earnings and cash flow streams.

Wayne: Before we wrap this discussion up, Jeff, how would advisors implement a solution for their clients, given the opportunity that we just discussed?

Jeff: Sure Wayne. So first we would suggest to not get too hung up on the macro noise. While the headwinds are, in fact, real, they could also be deemed transitory in nature.

Second, when you invest internationally, consider actively-managed strategies and let the investment managers, as well as the underlying business managers, who are the experts, navigate the waters for you. And to back up that assertion, we have a graph in the presentation that clearly shows the median active international manager has outperformed developed and emerging markets indexes.

And lastly, we recognize how important dividends are to the total return for the U.S. markets, and that is certainly also true internationally. And, as importantly, dividends have the ability to reduce the volatility of the returns.

Wayne: Jeff, let’s wrap up our conversation here. But want to remind our advisor audience to contact your regional partner for access to the complete thought leadership narratives—both fixed-income and equities—but for now, Jeff, thank you, and we hope you’ll join us again.

Jeff: Thanks for having me, Wayne.

Wayne: Until next time, I’m Wayne Badorf. Thank you for listening to The Essential Practice podcast.


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