Money for The Rest of Us

Investment help and financial guidance for the rest of us.

  • Home
  • Topics
  • Your Info
  • Contact
  • Log In
  • Search
  • About
  • Podcast
  • Guides
        • Asset Classes

        • A Complete Guide to Investing in I Bonds and TIPS (2023)
        • A Complete Guide to Equity REIT Investing
        • A Complete Guide to Mortgage REIT Investing
        • A Complete Guide to Investing in Gold
        • A Complete Guide To Investing In Convertible Bonds
        • Investing in Bitcoin, Oil, and Volatility ETFs
        • Carbon Investing and its Effect on Climate Change
        • Farmland Investing
        • The Opportunity and Risk of Frontier Markets
        • Investment Vehicles

        • A Complete Guide to Investment Vehicles
        • How to Invest in Closed-End Funds
        • What Are SPACs and Should You Invest in Them?
        • IVOL ETF Analysis and Review
        • Fundrise Real Estate Interval Fund Review
        • Money and Economics

        • A Complete Guide to Understanding and Protecting Against Inflation
        • Understanding Web3 Investing
        • Strategy

        • Why You Should Rebalance Your Portfolio
        • What Is Risk vs Uncertainty?
        • Tail Events and Tail Risk
  • Members
        • Tools

        • Asset Allocation and Portfolio Tools
        • Current Investment Conditions and Strategy Report
        • All Investment Conditions Reports
        • Strategic and Adaptive Model Portfolios
        • David’s Current Portfolio
        • David's Portfolio Trades
        • Podcast

        • Plus Premium Episodes
        • Submit A Question to the Plus Podcast
        • Courses

        • Investing in Closed-End Funds
        • Resources

        • Member - Getting Started Guide
        • Member Tools and Downloads
        • Topic Index
        • Glossary
        • Most Influential Books
        • Forums
  • Join
You are here: Home / Are International Stocks Overvalued? Outlook for International Stocks

Are International Stocks Overvalued? Outlook for International Stocks

ARTICLE TABLE OF CONTENTS (Skip to Section)

International Stocks Dividend Yield
Currency Impact on International Stock Performance
International Stock Price-to-Earnings Ratio

Expected Returns for International Stocks
How to Invest in International Stocks
Conclusion

by David Stein | Updated March 2, 2023

International stocks, which represent stocks that trade outside of the United States, have significantly underperformed the U.S. stock market over the past decade. International stocks are sometimes called overseas stocks or foreign stocks.

For the period ending February 28, 2023, U.S. stocks, as measured by the MSCI USA Index returned 11.6% annualized compared to 4.8% for the MSCI World Ex U.S.A. Index, a measure of international stock performance.

International Stocks Dividend Yield

International stock’s performance trailed U.S. stocks even though international equities’ dividend yield is twice that of U.S. stocks. 

Dividends represent cash distributed to common stock shareholders.

The dividend yield is the dividends per share divided by the price of a stock or stock index.

Over the past decade, the dividend yield for the MSCI World Ex-U.S.A. index has averaged 3.1% compared to 1.9% for U.S. stocks.

As of February 28, 2023, international stocks’ dividend yield is 3.1%, close to its long-term average of 3.0%. 

International stocks are not overvalued when considering the dividend yield.

Currency Impact on International Stock Performance

International stock performance can be calculated in different currencies. The 4.9% annualized return for non-U.S. stocks over the past decade was quoted in U.S. dollars. 

The 10-year performance of the MSCI World Ex U.S.A. Index in local currency was much higher at 7.4%.

Over the past decade, the U.S. dollar appreciated by 24% relative to the rest of the world.

A strengthening dollar reduces international stock performance when converted into U.S. dollars. This is because non-U.S. dividends and unrealized gains are worth less in dollar terms.

The strengthening dollar reduced international stock returns by about 2.7% per year over the past decade.

Become a Better Investor With Our Investing Checklist

Become a Better Investor With Our Investing Checklist

Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

International Stock Price-to-Earnings Ratio

Another reason international stocks trailed U.S. stocks over the past decade is U.S. stocks got more expensive while international stocks got cheaper.

As of February 28, 2023, the price-to-earnings ratio of international stocks is 14.4, as measured by the MSCI World ex U.S.A. index.

The long-term average P/E ratio for international stocks is 18.5. International stocks are undervalued as measured by the price-to-earnings ratio.

A decade ago, the P/E ratio for international stocks was 15.4. The decline in the price-to-earnings ratio for international stocks over the past decade lowered international equity returns by about 0.6% per year.

Meanwhile, the P/E ratio for U.S. stocks increased from 15.3 a decade ago to 20.8 today. The increase in U.S. stocks’ P/E ratio contributed about 3% per year to U.S. stocks’ performance for the ten years ending January 31, 2023.

International Stocks and U.S. Stocks Performance Attribution for 10-Year Period Ending February 28, 2023

Expected Returns for International Stocks

Expected returns for stocks are a function of the dividend yield, how much dividends increase as corporate earnings grow, and whether stocks get more expensive or cheaper.

Currency fluctuations also impact international stock returns if returns are converted to U.S. dollars.

If we assume a dividend yield of 3.1% for international stocks and earnings growth of 5.3%, which is how much earnings grew per year over the past decade, then international stocks could return 8.4% annualized over the next decade. 

These expected returns are nominal before backing out inflation.

If the P/E ratio of international stocks rises, so it moves closer to its long-term average, then international stock returns could return over 10% annualized over the next decade.

Of course, international stock returns could be lower if earnings growth comes in less than 5.8% per year or if international stocks get cheaper than they are today.

International stock returns in U.S. dollars could be even higher if the U.S. dollar weakens over the next decade.

How to Invest in International Stocks

Individuals often ask, “Should I invest in international stocks?” The answer is yes because international stock expected returns over the next decade could be 9% or more.

The easiest way to invest in international stocks is through an index mutual fund or exchange-traded fund. 

This table provides some examples of international stock funds and ETFs.

NON-U.S. EXCLUDING EMERGING MARKETS EQUITYTICKEREXPENSE RATIO
Vanguard FTSE Developed Markets ETF VEA0.09%
Vanguard Developed Markets FundVDVIX0.16%
Fidelity ZERO International Index FundFZILX0.00%
iShares Core MSCI EAFE ETFIEFA0.08%
Schwab International Equity ETFSCHF0.06%

Conclusion

International stocks are not overvalued.

This is because their price-to-earnings ratio is lower than average and the dividend yields are close to average.

A combination of a cheaper-than-average price-to-earnings ratio and high dividend yield could allow international stocks to outperform U.S. stocks over the next decade, even though they lagged U.S. stocks over the past ten years.


David Stein

David Stein is the founder of Money for the Rest of Us. Since 2014, he has produced and hosted the Money for the Rest of Us investing podcast. The podcast reaches tens of thousands of listeners per episode and has been nominated for ten Plutus Awards and won one. David also leads Money for the Rest of Us Plus, a premium investment education platform that provides professional-grade portfolio tools and training to over 1,000 individual investors. He is the author of Money for the Rest of Us: 10 Questions to Master Successful Investing, which was published by McGraw-Hill. Previously, David spent over a decade as an institutional investment advisor and portfolio manager. He was a managing partner at FEG Investment Advisors, a $15 billion investment advisory firm. At FEG, David served as Chief Investment Strategist and Chief Portfolio Strategist.

Become a Better Investor With Our Investing Checklist

Become a Better Investor With Our Investing Checklist

Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Ready to get serious about your investing?

Access professional-grade portfolio tools, training, and a community to help you stay on track, tune out the noise, and grow your wealth with confidence.

Learn How

J. David Stein
Darby Creek Advisors LLC
P.O. Box 68544 • Tucson, AZ • 85737

Copyright © 2023 • Disclosures, Privacy Policy, and Cookie Policy • Site by Tempora

Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}
Manage Cookie Consent
We use cookies to optimize our website, marketing, and services. We never sell users' data.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage vendors Read more about these purposes
View preferences
{title} {title} {title}