The U.S. has led the developed world in working its way through and out of the Great Recession. Our economy is modestly growing now: job growth and unemployment have improved, consumers are confident, the Fed halted its quantitative easing program, and our economy and markets have stayed the course.
However, the European Union (EU) and Japan, two sizeable constituents of the developed world and representing about 75% of the MSCI EAFE (Europe, Australasia and Far East) Index, are not yet solidly on the recovery trail. Of late, though, there are actions and evidence to suggest improvement, including: European Central Bank (ECB) announced quantitative easing of $68 billion/month until September 2016, aggressive quantitative stimulus continues in Japan, surveys of business and economic conditions improved significantly in the all-important German economy, improving leading economic indicators of late in Japan, weaker euro and yen helped drive exports (Japan reported a recent surge), and lower oil prices were an added tailwind. The stock markets in EAFE countries seem to sense this shift as prices have advanced, however valuations remain relatively attractive. The table below highlights select metrics across economic, valuation and market measures.
The developments in Greece have been a challenge. Its newly elected leadership recently engaged in heated discussions with the EU over the terms of its bailout. While eventually a compromise was reached, Greek interest rates in the interim skyrocketed from 5% to 11%. Many worried about dysfunction in Europe, but as the graph illustrates, bond markets (e.g. Spain and Italy) during the negotiations actually saw yields decline rather than rise – an encouraging sign, should Greece come back in the crosshairs.
We know structural/political hurdles remain across the EU, Japan and other non U.S. developed markets. However, policy initiatives (stimulus) and progress to date, coupled with relatively attractive stock market valuations (e.g. EAFE’s price-to-earnings ratio) have moved us to upgrade our outlook for EAFE with the potential to go higher if direction continues and if Ukraine tensions moderate. We still maintain our positive view on U.S stocks.