Beyond a reasonable doubt, it’s been a good year for the U.S. markets. Bolstered by a firm domestic recovery, indexes have ignored international headwinds for most part of the year. An improvement in the employment situation led to the Fed ending its third round of bond buying. Further, expectations of a sooner-than-expected rate hike are gaining strength.
However, it is quite a different story when it comes to international markets. The rest of the world has faced troublesome economic conditions. This includes such dependable growth stories such as China and India. Prime Minister Shinzo Abe’s stimulus measures are being tested in Japan. Despite these factors, stocks in China and Japan have gained recently. However, overall gains still lag the performance clocked in by the US markets.
A Domestic Recovery
To put things in perspective, all U.S. indices are set to end the year in the green. Despite a late correction, the Dow, S&P 500 (.INX) and Nasdaq have gained 3.6%, 7.6% and 10.3% respectively, year-to-date. A recovery in GDP has been the primary reason for these gains.
GDP shrunk 2.9% in the first quarter of 2014, the worst performance in five years. However, GDP increased by 4.6% in the second quarter and 3.9% in the third quarter, according to the second estimate. Real personal consumption expenditures fueled growth on both occasions.
Meanwhile, the economy added the most number of jobs in November since Jan 2012. The economy also added a minimum of 200,000 jobs for 10 straight-months in November. This is the longest stretch in more than 30 years. Unemployment rate remained at a six-year low of 5.8%.
Eurozone Struggles
However, the rest of the world has faced economic difficulties, particularly, Europe. Benchmarks notched record highs early in June after ECB reduced its key interest rates. The refinancing rate was lowered to 0.15% from 0.25% and the marginal lending facility rate was reduced to 0.40% from 0.75%. ECB also cut the deposit rates to -0.10%; thereby becoming the first central bank to have a negative rate.
Additionally, ECB deployed a series of targeted long-term refinancing operations in an effort to boost bank lending to the non-financial private sector in the Eurozone.
However, data coming in from this part of the world has been intermittently worrying. For instance, earlier this month, industrial output in Germany expanded 0.2% in October, less than analysts’ expectation of a rise by 0.3%. Previous months’ data was also revised lower to growth of 1.1% from 1.4%.
Even so, the DAX has crossed pre-crisis levels. Being an energy importer, it may benefit from lower oil prices. However, it remains susceptible to Russia related tensions though. In contrast, the FTSE 100 closed at its lowest level in nearly 18 months following a slump in oil prices.
Following a recent meeting, the ECB President Mario Draghi indicated that the ECB may consider additional monetary stimulus in the Eurozone to revive the economy. However, he also added that monetary expansion may be provided by early 2015.
Moreover, ECB also kept the interest rate unchanged at record level of 0.05%. ECB also lowered its guidance for next year’s economic growth in the common currency bloc. The central bank now expects that the economy will grow at a pace of 1%, down from its earlier projection of 1.6%. Draghi stated that the decline in oil prices will increase deflationary pressure in the area.
The Ukraine crisis and the standoff with Western countries invited sanctions on key Russian economic sectors and companies belonging to bank, energy and defense.
Russia’s central bank sees its economy shrinking by 4.5-4.7% if oil continues at around $60 per barrel. Meanwhile, the ruble has tumbled to a record low versus the dollar. Analysts have indicated that the U.S. Congress will contribute funds to help Ukraine combat insurgents.
Japan’s Jitters
Japan’s economy contracted for the second successive quarter, surprising economists and market watchers. GDP declined 1.6% in the Jul-Sep period, following a contraction in the second quarter. Second quarter’s contraction was revised from the earlier estimate of 7.1%, to a marginally worse number of 7.3%.
This was possibly a result of a hike in consumption tax in April from 5% to 8%. Subsequently, the Bank of Japan announced that it will step up asset purchases to 80 trillion yen on annual basis. This is a significant increase from its earlier announced target range of 60-70 trillion yen.
These announcements led to the Japanese Prime Minister’s call for a snap election in mid-December, two years ahead of schedule. Following a decisive victory for Abe, the Nikkei declined 1.6% on Monday to close at its lowest level since Nov 17.
China’s Challenges
Meanwhile, China continues to face its own set of challenges. On Nov 21, the People’s Bank of China (PBOC) decreased the one-year benchmark lending rate by 40 basis points to 5.6%. This is the first reduction in rates undertaken in more than two years.
The move to reduce rates has come after several economic reports indicated weakness in the economy. Dismal manufacturing data and a slump in the real estate sector meant that the GDP growth target looked increasingly unattainable.
Over the next week the benchmark gained 9.5%. During the two weeks following the rate cut, a slew of new investor accounts were created to trade on the Shanghai stock exchange. The outlook for China stocks continues to be strong despite recent volatility and subsequent control measures taken by the market regulator. Most analysts expect the benchmark index to consolidate around the 3,000 mark.
Foreign Stocks Beating U.S. Markets
Given the struggles of markets across the world, it may seem only the U.S. markets have emerged unscathed in 2014. Others have recovered from pre-crisis levels, but have not stabilized around new highs.
Additionally, economic fundamentals for the rest of the world remains shaky, raising questions about the sustainability of any gains made. The notable exception is, of course, China, where the benchmark Shanghai Composite has gained 43% year to date.
Consequently, it presents several good investment alternatives. We have explored some of them earlier in greater detail. (Read: 3 Stocks to Ride the China Rally). This is why we offer three alternatives from across the world, each of which has a good Zacks Rank. Most importantly, they have secured higher year-to-date returns than any of the three major U.S. benchmarks.
Ryanair Holdings plc (RYAAY) is the holding company for Ryanair, a scheduled-passenger low-cost airline. The airline is a short haul service operating on point-to-point routes linking the UK, Europe, Ireland and Morocco. The company is headquartered in Dublin, Ireland.
Ryanair holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 40.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 19.09. The stock has gained 43.8% year-to-date.
Advanced Semiconductor Engineering Inc. (ASX) manufactures, assembles, processes, tests and distributes ICs. The Taiwan-based company also provides test-related services such as front-end engineering testing, wafer probing and final logic testing.
Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 22.4%. It has a P/E (F1) of 13.27x. Advanced Semiconductor Engineering has gained 28.5% year-to-date.
Check Point Software Technologies Ltd. (CHKP) offers a comprehensive range of software and combined hardware and software products aimed at IT security. The company is headquartered in Tel Aviv, Israel.
Check Point Software holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.3%. It has a P/E (F1) of 22.23x. The stock has gained 18.7% year-to-date.
Next year presents several challenges for the global economy. Among them are the costs and benefits of lower oil prices. More importantly, various stimulus measures have been introduced across China, Japan and Europe. The efficacy of these measures will determine the health of the global economy to a significant extent.
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