“FANG” and other big cap tech have faded as favorite trades, but i nvesting in foreign stocks as a way to generate better returns is just beginning. “When you have a year as bad as last year was, no matter what part of the world you’re in, it just leads you to look at more things,” said Matt Maley, Miller Tabak chief market strategist. “The U.S. worked so well for so long, they just haven’t had to look at other things. It forces investors to look at a broader array of opportunities than they have in a decade.” The outperformance in foreign markets has not gone unnoticed by U.S. investors, bruised by the 19.4% decline in the S & P 500 last year. Germany’s DAX , for instance, is up about 8.5% since the beginning of the year and about 26% since its Sept. 29 low. .GDAXI 1Y line germany Hong Kong’s Hang Seng index is up nearly 10% so far this year, and Mexican stocks are up 11%. In contrast, Google parent, Alphabet, a FANG member was up about 3.3% in the new year, but it is still down about 6.5% since late September. Other members of FANG include Facebook parent Meta Platforms, Amazon and Netflix. Investors also group the biggest market cap stocks, Apple and Microsoft , under the FANG umbrella. Amazon and Meta are up double digits since the start of the year, but Amazon is down 40% over the past 12 months and Meta is down about 58%. While the S & P 500 is up just over 11% from its October closing low, Apple is actually down about 3.6% in that period. “Some of the shifts we’re seeing within the U.S. market away from tech leaders more to leadership from industrials, basic materials and energy – that represents a higher share of markets like Europe and emerging markets,” said Liz Ann Sonders, chief investment strategist at Charles Schwab on CNBC. “That helps explain why they’re doing better than the U.S.” What’s driving it? The increased interest in foreign markets has had multiple catalysts. For one, the U.S. dollar has been weakening and that removes a headwind from corporate profits in many countries. Also, investors in foreign stocks will benefit if their local currencies gain against the dollar. “This theme is catching on like wildfire this week,” noted Maley of the weakening dollar. He said the dollar index fell below the key 103 level, and there could be an important reversal in trend if it keeps declining. The dollar index was just above 102 Friday. Another major catalyst was China’s abrupt move away from its Zero Covid policy. That means its reopening could be speeded up, and that could ultimately help its economy and positively impact its Asian neighbors. Maley said a report this week from Goldman Sachs saying Europe could escape a recession also helped drive even more interest in those markets. The Goldman economists pointed to China’s reopening as a potential boost for Europe’s export economy. Europe is also expected to come through the winter without a major hit to its economy from an energy shock, thanks to warmer weather, falling prices and sufficient supplies. The international trade has been called out by major Wall Street firms, like Bank of America which last week said “buy the world.” “We are full on into it, and we love China,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. “Away from China, we love European and Japanese financials.” ‘First inning’ The iShares MSCI European Financials ETF is up 9.6% since the beginning of the year. EUFN 1Y line euro fins “This is the first inning of a nine inning game of international outperformance,” said Emanuel. “The international markets could go on a multi-year outperformance.” Investors are now monitoring foreign markets much more and focusing on what’s happening in currency pairs, like dollar/yen. “It’s the same psychology as saying we’re not focused on FANG anymore because as investors have come to realize in an era where money isn’t free anymore, it’s going to require more careful security selection and a broader perspective, more things matter,” said Emanuel. “Now FANG is officially no longer the only game in town. Everything else matters more.” Emanuel said he expects China to continue to deal with waves of Covid, but its reopening should be successful by some time in the second half of the year. “You can see anecdotally people feel liberated in terms of their ability to travel,” he said. “There has been a trillion in accumulated excess savings on the part of Chinese consumers over the past year and a half.” Investors have been piling into China investment plays. KWEB 1Y mountain kweb Since the start of the year the iShares China Large Cap ETF , FXI has jumped about 13%, while the KraneShares CSI China Internet ETF or KWEB is up about 16%. The EEM, or iShares MSCI Emerging Markets ETF is up 8.5%. David Lutz of JonesTrading said he has noticed the most activity in the KraneShares ETF. “I think that was the early mover and main leader in the space,” he said. “Many people are really bulled up on China.” He said the EEM, iShares MSCI Emerging Markets ETF is attracting more interest. As for Europe, he has not noticed as much action in European ETFs. “I think a lot of investors will play Europe stocks right out of the gate,” he said. Emanuel said European and Japanese stocks had been held back by years of negative interest rates, and now that’s changing as central banks tighten policy. “The easiest, biggest reason is because the dollar’s 11-year rally ended on Sept. 28, which is also why we look at gold,” he said. “We’re not calling for a dollar plunge, but it’s a change in psychology. People are getting more comfortable with this idea, particularly since Europe and now Japan, are breaking the psychology around negative interest rates.”
