International Stocks Continue to Outperform S&P 500 as Dollar Weakness Persists

Investors in international stocks have seen strong returns for over two years now, beating the S&P 500 index. A weak U.S. dollar has been a contributing factor to this success, and experts believe it will continue to benefit investors in foreign equities.

David Botset, head of strategy at Schwab Asset Management, notes that international stocks have attracted significant inflows over the past year, with $90 billion invested in large-cap foreign stocks. He attributes this trend not just to performance chasing but also to a growing recognition of the benefits of diversification across various angles.

Josh Jones, portfolio manager at Boston Partners, agrees that a weak dollar is essential for international investors. He points out that since the pandemic, valuations in large-cap overseas stocks have been lower than those in the U.S., making them more attractive to fundamental value investors like his firm. The weakness of the U.S. dollar has overlapped with this trend and should not be overlooked by investors.

Jones notes that when looking back at history, the best periods for international investments from a U.S.-based investor's perspective have been associated with good returns in local markets combined with a weak dollar environment. He cautions that his firm is not in the business of forecasting currencies but believes it is reasonable to assume some dollar weakness given recent headlines.

The sectors benefiting most from this trend are materials, industrials, and metals and mining, according to Jones. These have historically performed well during periods of a weak dollar, such as the 1970s and 2000s. He acknowledges that metals and mining companies have traditionally been challenging for investors due to their capital-intensive nature and questionable capital allocation decisions.

However, in recent years, this trend has reversed, with metals and mining companies demonstrating strong business momentum and earnings growth. Jones believes that this could be a sustained trend over the next few years, particularly given the historical association of these sectors with periods of dollar weakness.