If your portfolio mirrored the global stock market, you’d have only about half of your assets in U.S. stocks. You don’t need to put 50% of your money in overseas stocks, but in 2016, you may be penalized for being too provincial. “We are tilted to international stocks rather than to the U.S.,” says Charles Shriver, who runs T. Rowe Price Global Allocation Fund. He has increased international holdings in the fund’s portfolio by a few percentage points. He likes emerging markets and prefers Europe among developed markets.
The case for Europe is strong. The Continent’s economies are gaining traction from rock-bottom interest rates, a falling euro (which helps boost exports) and pent-up demand. Bargains abound. Stocks in eurozone markets trade for less than 14 times estimated 2016 corporate earnings, compared with a price-earnings ratio of 16 for U.S. stocks. Moreover, earnings should rise by about 8% in 2016, compared with 6.5% for U.S. companies, according to Wells Fargo Investment Institute. Finally, dividends are more generous across the Atlantic, with the average yield more than 3% compared with 2% here.
Stick with well-known, high-quality stocks. Ernest Cecilia, chief investment officer at Bryn Mawr Trust, recommends Novartis (symbol NVS, $90), the Swiss pharmaceutical giant. Harding Loevner portfolio manager Richard Schmidt favors energy stocks that he thinks have been punished unfairly as the price of oil has plunged. Among his favorites are Schlumberger (SLB, $78), the French energy-services giant, and Luxembourg-based Tenaris (TS, $25). (All of our picks trade in the U.S.; prices are as of October 30.)
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Fund investors should consider Kiplinger 25 member Artisan International (ARTIX), which at last word had 56% of its assets in developed European countries. But hurry: The fund closes to new investors in February. Artisan does not hedge against currency swings. FMI International (FMIJX), another member of the Kip 25, does hedge and so will benefit if the dollar continues to strengthen.
Japan is a mixed picture. The bulls argue that economic reforms are bolstering growth, albeit slowly. But Saira Malik, global stock chief at investment firm Nuveen, isn’t convinced. “We’re just not seeing the results,” she says. “Growth is going in the wrong direction in Japan.”
Still, you can find promising stocks even in iffy markets. Japan’s Fanuc (FANUY, $29) is a major player in the fast-growing market for robots that are primarily used to automate factory work. In China, cash in on the burgeoning consumer economy with Ctrip.com Intl. (CTRP, $93), a travel-services firm.
Emerging markets will appeal to bold investors in 2016. Of course, the group encompasses diverse countries with varying prospects. For fund investors seeking broad exposure, we favor Kip 25 member Harding Loevner Emerging Markets (HLEMX), which Schmidt comanages. Risk-tolerant investors can zero in on a robust market with Matthews India Fund (MINDX). India’s consumer-driven economy is benefiting from declining inflation. For more on India and other attractive developing markets, see our special report on foreign stocks and emerging markets.
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