The “Trade of 2017” That No One is Talking About

Well, the U.S. has done it again…

As I write, the Dow is up 18% for the year. Our domestic stock market has handily outperformed most of the world’s developed (and developing) markets in 2016.

There are two primary reasons for this.

The first is that U.S. stocks put on a furious rally in the aftermath of the November election, as investors calculated that Republicans in Washington will slash taxes, reduce onerous federal regulations and pass other pro-business policies early in 2017.

The second is that the dollar is up sharply against a basket of international currencies, hitting a 14-year high this month.

A stronger greenback diminishes the returns of foreign markets when you’re keeping score in dollars.

With inflation low, energy cheap and the economy strong enough for the Fed to raise rates, the U.S. market appears poised for further gains in 2017.

However, that doesn’t necessarily mean it will be the best place for investors to be.

The U.S. market has beaten the MSCI World Market Index for several years in a row, as it has occasionally in the past.

But all markets go through up and down cycles. At some point, lagging markets in Europe, Asia and Latin America will turn in stellar performances.

No one knows exactly when, of course. But the key – as Wayne Gretzky pointed out – is to skate not to where the puck is, but to where it is going to be.

International markets are cheap right now. One day, global investors are going to wake up and recognize it.

Consider just two inexpensive asset classes: Japanese and emerging market equities.

Right now, the S&P 500 sells for 25 times trailing earnings. That is well above the historic average P/E of 16.

Many analysts believe this higher multiple is justified, given an improving economy and prospects for higher corporate earnings in 2017.

But things are looking better overseas too. Yet stocks there are considerably cheaper. Japanese stocks sell for just 16 times trailing earnings. Emerging markets sell for only 15 times earnings.

Look at other important metrics. U.S. stocks sell for 2.8 times book value. In Japan, it’s just 1.3 times book. In emerging markets, it’s 1.6 times.

The current dividend yield on U.S. stocks is 2.1%. It’s slightly higher in Japan – a country that has traditionally had far lower payouts – and 2.5% in emerging markets.

You can easily see that these two asset classes – in addition to giving you a diversification benefit – are more attractively priced in relation to earnings, net asset values and dividend yields.

Yet few American investors are looking at foreign markets now. They are happy with their U.S. stock returns and expect to be made happier still in the year ahead, without bothering to venture abroad.

And, of course, the U.S. could lead world markets higher in 2017. The outperformance of the last few years could continue for a while.

But it won’t continue forever.

Those with a bit of foresight can easily capitalize on the eventual changing of the guard with two highly liquid and broadly diversified ETFs: iShares MSCI Japan (NYSE: EWJ) and iShares MSCI Emerging Markets (NYSE: EEM).

And perhaps you should. Because – eventually – that’s where the puck is going to be.

Good investing,

Alex

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Source: Investment U