This article was originally published on ETFTrends.com.
The disconnect between U.S. equities and international stocks is growing wider, but this disparity will not last forever. After the recent underperformance in foreign markets, exchange traded fund investors may find an opportune moment to jump into relatively cheap global equities.
"The recent divergence in the performance of US Equities vs. the rest of the world is unprecedented in history. For instance, if one looks at price momentum – it is positive for US stocks and negative for Europe and Emerging markets across all relevant lookback windows [one month, three months, six months and 12 months]. This has never happened before," J.P. Morgan quantitative and derivative strategist Marko Kolanovic said in a note, according to CNBC.
Consequently, the J.P. Morgan strategist argued that international stocks will outperform the domestic market for the rest of the year as the relative moves between global markets are so unprecedented that it will not likely persist.
"In other words, something will give – either the US will fall or EM and Europe equities will catch up and move higher," Kolanovic said.
While Kolanovic acknowledges that things could get worse if the trade war with China worsens, but the strategist believed that the conflict will be resolved, which may fuel a strong rebound in international markets.
"We believe an escalation will likely be averted and that a trade resolution and weaker [U.S. dollar] will lead to a 'risk on' convergence," the strategist said.
In a separate note, J.P. Morgan's Bram Kaplan added on to the "risk on convergence" call, predicting emerging markets will outperform the U.S. stock market ahead and adding that in this scenario the domestic stock market will still go higher but not as much as international equities.
To capitalize on a potential turnaround in international markets, ETF investors may look to a number of targeted international plays. For instance, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) are two most popular and largest EM-related ETFs on the market.
The iShares MSCI EAFE ETF (EFA) and Vanguard FTSE Developed Markets ETF (VEA) are two popular ETF picks to track developed markets outside the U.S., including developed European, Australasia and Far East countries.
For more information on the international markets, visit our global ETFs category.
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