NEW YORK -- Go west, investors. Oh, and east too.
Stocks are back en vogue five years after the financial crisis, but the interest isn't universal: Investors are piling into mutual funds that own stocks outside the United States, whether it's from Asia to the west or Europe to the east. Last year, investors poured a net $137 billion into global stock mutual funds, according to TrimTabs Investment Research. That's more than seven times the $18 billion that went into U.S. stock funds.
The numbers look more balanced after including investments in exchange-traded funds, which hedge funds and other professional investors use more than traditional mutual funds, but the trend remains intact. A total of $195 billion went to global stock mutual funds and ETFs versus $156 billion to U.S.-only offerings.
The preference for foreign stock funds is a bit surprising, as investors often get criticized for chasing what's hot. Last year, U.S. stocks beat many other markets, and the Standard & Poor's 500 index had its best year since 1997. Edward Perkin, chief investment officer of international and emerging-markets equity at Goldman Sachs Asset Management, talked about what's attracting investors.
Q: Foreign stocks have been scary in recent years, due either to the European debt crisis or slow growth in emerging markets. How much resistance is there from investors to foreign stocks?
A: I think six to 12 months ago, there was definitely resistance. There also tends to be a structural bias toward your home country. It's what you know. With the U.S., you can kind of get away with that because the U.S. represents 40 percent of the world's equity market capitalization. But we think you're missing a lot if you don't access non-U.S. stocks, and that message has been resounding increasingly over the last six months. Some of the fears around the sovereign debt crisis are abating, and people are getting more comfortable with the idea of putting money overseas.
Q: So, Europe looks good?
A: There's a good story around Europe. European earnings are 35 percent below where they were in 2007, the peak year, so there's a lot of room to catch up. Expectations for 2014 are for 16 percent growth in earnings per share, and we think we're moving into a period when the next leg of equity market returns is going to have to come from earnings growth rather than from the price-earnings multiple.
Q: Where's that growth coming from? Sales that European companies are making to customers in the U.S. and other countries? Or also European growth?
A: Both. The forecasts for European economic growth in 2014 are about 1 percent, which is not a heroic number. But the swing from minus to positive is more dramatic than people realize. The analysis we've done suggests that the biggest driver of earnings is not the absolute level of GDP but the rate of change. And if you look anywhere in the world, you're getting a bigger inflection point in Europe than anywhere else.
Q: So Europe is by far the best place to be now?
A: We're overweight Europe in our global portfolio now, but I think Japan is interesting too. The thing that's really been missing in the global economy is animal spirits: CEOs and boards of directors being more willing to make aggressive decisions.
So we're on the lookout for signs of optimism and animal spirits. Where we're seeing that first is Japan. We've had a number of our portfolio managers go to Tokyo in the last two or three months, and they come back with stories of the hotel bars and restaurants being full of people - both locals and foreigners - with a buzz in the air and a positive spirit.
Q: Emerging-market stocks struggled last year. Are they cheap enough to get you interested?
A: If you're a long-term investor putting money to work, you'll probably do alright. But versus the last 10 years, where emerging markets moved as a single asset class, you've got to be more selective. We're favoring the stuff that worked last year, and we're underweight what didn't work. We like anything facing the developed markets, export-oriented places like Korea, Taiwan, Mexico.
Q: Do you think stocks are in a bubble?
A: I think any notion that there's a bubble is misplaced. You have too many people saying there's a bubble. If things were at an extreme, you'd expect to see more people explaining why it's not an extreme, which is maybe what I'm doing now. But there's sufficient debate about whether stocks are cheap or expensive and whether the economy is growing or not that it's healthy. When everyone is standing around saying there are no risks is when you need to worry.